Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Don’t ignore the adjustment that has taken place; the US trade deficit is half its size this time last year …

by Brad Setser
July 19, 2009

Most reporting on the May trade data tried to fit it into the “green shoots” meta-narrative, thanks to the small uptick in exports. Never mind that total exports were about equal to their level in March even after the May uptick– and that about half the uptick between May and April came from a sharp rise in petroleum exports (see Exhibit 9). I have a hard time seeing how that signals a sustained uptick in US activity.

On a y/y basis, the fall in exports does seem to have stabilized. Moreover, the y/y fall in exports seems to have stabilized with a bit before the fall in imports stabilized, and the percentage fall in non-oil imports (around 25% y/y) is a bit larger than the percentage fall in non-oil exports (around 20% y/y).


But y/y changes don’t tell us all that much. Levels are what count.

Real (goods) exports and especially imports have been essentially flat for the last three months or so. The Los Angeles and Long Beach port data suggests nothing much changed in June. That is progress. Exports, imports and indeed activity were all in free fall for a while in q4 and q1. But the trade data – backward looking data, to be sure – still fits comfortably with Jan Hatzius’ argument that final demand is going sidewise more than recovering.


But exports have stabilized after a smaller fall than imports. Real exports are at their late 2005 levels. Real imports are at their late 2003 levels. That means the non-oil trade deficit has fallen significantly.


The non-oil deficit over the last three months was only $40 billion — about 1/3 of its level in late 2005 and early 2006. The non-oil deficit actually isn’t that far from the levels typical of most of the pre-boom 1990s.

Of course, oil prices aren’t likely – unless you believe Philip Verleger – to return to their 1990s (or 2002) levels, so the overall deficit is still a bit bigger than it was in most of the 1990s.

Still, there has been a major adjustment. The question is whether it will be sustained when the US recovers and US demand picks up.

That depends on the course of the dollar, to be sure. And of the course of the dollar depends on whether private demand for US assets picks up, as well as whether countries like China maintain dollar pegs. But it also depends on the nature of the global recovery – and the strength of stimulus policies other countries adopt. And their at least there is a bit of hope, at least so long as China sustains its current highly stimulative policies. China’s June surplus was lower than expected, in part because China’s imports picked up before China’s exports. That’s goods news for global adjustment.

There sometimes is a tendency to speak about the world’s macroeconomic imbalances as if nothing has changed. That increasingly strikes me as a mistake. The world’s imbalances haven’t gone away, but they have shrunk dramatically.

Japan is now running an external deficit. China’s surplus shrank, at least in q2. The US deficit is much smaller now than in the past. Europe’s internal imbalances also have shrunk.

The adjustment came the painful way – with sharp falls in exports and imports. But it was still adjustment. The trade deficit fell sharply. The rise in the public borrowing buffered an enormous fall in private borrowing, and private demand. It cushioned rather than stopped the adjustment. The challenge now is try to make sure the recovery doesn’t undo the adjustments that happened during the crisis.

One last point: the lion’s share of the US deficit now comes from the United States petroleum import bill. Discussions about the policies that gave rise to imbalances typically focus on macroeconomic policy choices. That increasingly strikes me as incomplete. Energy policy should enter the calculus too. The US isn’t going to start exporting petrol – not on a net basis — anytime soon. But it certainly could do more to reduce its demand for imported energy.


  • Posted by HZ

    Glad we are over half way there already. I think the events showed decisively that imprudent credit generation here was the major cause of the imbalance. CNY hasn’t moved all that much for this correction. Not that it is not a contributory factor but without the credit binge it wouldn’t matter all that much on the macro level. At the micro level sure it still causes all kind of distortions.

  • Posted by bsetser

    hz — the last leg of the adjustment in the non-oil deficit wasn’t the product of exchange rate moves but rather the collapse in us demand (tied to the credit crisis). but in my view the fall in the non-oil deficit from mid 06 to mid 08 was very much a product of dollar depreciation and the resulting period of faster growth in non-oil exports than non-oil imports. and going forward, if us import growth resumes, the deficit will widen absent renewed growth in us exports. and the data linking the pace of export growth to the real exchange rate is my view quite good.

  • Posted by Bob_in_MA

    The U.S. was consuming 5% more than it produced and households and businesses borrowed to cover the gap. Then those sectors became insolvent.

    Now we are consuming “only” 2-3% more than we produce and the U.S. Treasury is borrowing to fill the gap. Meanwhile, households are still carrying about the same debt/income level that led to the crisis.

    I think it’s safe to say there is zero chance of a recovery undoing the adjustments that happened during the crisis.

    A recovery will come after the deleveraging, which has barely started.

  • Posted by Cedric Regula

    On reducing the oil deficit:

    DOE breakdown of our oil usage is is 50% gasoline, 20% diesel and jet fuel, and 30% other things which include heating oil and by-products which we get as a result of refining anyway. Also about 5% of electricity production is still from oil.

    The low hanging fruit is to replace heating oil with natural gas. Also do away with electric generation from oil.

    The new CAFE passed by the current admin calls for 30% increase in mileage by 2017. So that knocks off 15% total usage there.

    This will be accomplished by tech improvements and right sizing vehicles. Hybrids are the best known tech improvement, but clean diesel is here and improves efficiency 30% over conventional IC engines. Ultra lean burn IC engines are close to production and will be 20%-30% better. Turbocharging helps a lot, and then there is plug-in hybrid to shift the load to electric.

    All the above technologies can be done for $1500-$3000 per vehicle.

    A side benefit is CO2 goes down by the same amount, so already that puts us at 15% reduction and the 2020 goal is 25%. Do away with heating oil and that may put us almost there without “cap and trade”.

    So it looks like we can easily knock 25% of our oil usage. But that can easily be swallowed up by price increases.

    To go further than that we need to go more towards electrical power, and nuclear generation is the only cheap enough, zero carbon way.

  • Posted by ReformerRay

    ” The challenge now is try to make sure the recovery doesn’t undo the adjustments that happened during the crisis.”

    Right on. But what can the U.S. do in this regard?

    Second question. What products or services were reduced or changed in price to get the large drop in imports? Pesonal Consumption Expenditures increased from 4th quarter 2008 to first quaerter 2009. Why did imports drop so severely if consumption stayed up? Drop in parts used in manufacturing?

  • Posted by Too Much Fed

    Has the trade deficit gone down with china? How much?

    Has the drop in car sales affected the trade numbers with Japan, Canada, and Europe?

  • Posted by Too Much Fed

    “One last point: the lion’s share of the US deficit now comes from the United States petroleum import bill.”

    and china???

  • Posted by Rien Huizer


    It will be interesting to see if the US can keep this up while keeping GDP/capita stable or slightly growing for a couple of years. That should cause a few grey hairs in exporterland.

    Still, the Japanese steelmakers are restarting the blast furnaces they shut down earlier this year and that points to higher car exports from there.

    Incidentally, Japan is becoming really interesting.

  • Posted by Brick

    It may be dangerous to draw conclusions from the deficit changes and assume that rebalancing is in progress. The port data by volume rather than by value shows a slowly widening gap between import and export volumes. It would appear to me from the chart at calculated risk that import volumes are beginning to recover while export volumes less so.
    From the BEA report an important data point for me was the slight decrease from April to May of consumer goods imported. This may be due to competitive pricing but suggests that demand rather than moving sideways it might be in a shallow decline. Unemployment increasing and the expiration of unemployment benefit might be coming into play there.
    Expecting China to continue its stimulus policy seems unlikely since I expect China to reign in its banks lending. This might actually be good for the trade deficit by suppressing commodity prices once more. China’s NBS is still reporting producer price index falls and retail sales increases which is good news for china. This suggests to me China is gaining world market share whilst boosting its internal consumption. Some analysis of that internal consumption suggests to me that Europe and Asia may be fairing better than the US in Chinese market penetration.
    Global adjustment does look to be happening I am just not sure the US is participating to the same extent.

  • Posted by Ben Ross

    Cedric – While improved auto mileage is certainly a good thing, the emphasis in reducing oil use should be on investing in transit.

    New transit lines can stimulate a recovery in residential investment, because there is pent-up demand for urban living. Construction of single-family homes in outer suburbs will not revive for a very long time, if ever, because of the overhang of excess supply.

    In cities with good existing transit systems, prices of downtown and inner-suburb homes have held up much better than outer suburbs. You see the same thing in office vacancy rates. Yet many states still pour money into suburban highways.

  • Posted by Indian Investor

    The notices informing the General Motors dealerships of closure were sent by Fedex letter – further contributing to the most important upcoming theme in the US economy in the coming months:
    “Decline and Fall of the United States Postal Service”
    Exceprts from a CBS news desptach dated March 25, 2009:
    “The post office was $2.8 billion in the red last year and is facing even larger losses this year due to the sharp decline in mail volume in the weak economy.”…
    “Last week, the post office said it plans to offer early retirement to 150,000 workers and is eliminating 1,400 management positions and closing six of its 80 district offices across the country in cost-cutting efforts.” …
    “Officials said the economic recession contributed to a mail volume drop of 5.2 billion pieces compared with the same period last year. If there is no economic recovery, the USPS projects volume for the year will be down by 12 billion to 15 billion pieces of mail. ”
    “Over the past year the post office says it has cut 50 million work hours, stopped construction of new facilities, frozen salaries for executives, begun selling unused facilities and cut post office hours.”

    According to the latest Revenue, Pieces and Weights report from the Post Office:

    Standard Mail (letters) declined from 14.14 million to 11.31 million, between Q1 FY08 and Q1 FY09 (Postal Quarter Q2)

  • Posted by bsetser

    too much fed — I think there has been a slight fall in the bilateral deficit with china, though less of a fall than with the big auto exporters (us imports from china are down far less than us imports from Japan)

  • Posted by Cedric Regula

    Ben Ross:

    It’s possible, buses can easily be purchased. And if demand is there, cities can do it now. Thing is, everyone thinks everyone else should ride the bus, and they should have a car. But all-electric vehicles are practical for inner city commutes, and you can always rent a gasoline car when you want to go for a long drive somewhere else.

    It’s just that I’m skeptical that cities can de-design themselves. At least the ones that don’t already have subways and el-trains. They talked about it for decades in LA, then at the end of every urban planning meeting someone says, “Where do we put all the poor people while we bulldoze the city and build new highrise condos or townhomes?”. Everyone looks at each other, and then drives home to the suburbs.

    But that reminds me. There is “park and ride”. Drive the car a couple miles to a suburban parking lot and catch the bus downtown. That works if you work downtown. The catch is that many cities have de-centralized already, so that is another trend to reverse.

    All this could take the first half of the millennium to happen, and we don’t have that long.

  • Posted by Ben, the drama Queen

    Before that theory, there was another one that believed the courses should correlate also to the relative speed of debasing other components of index games relative to the debasing of names of a given index. But now we operate on the newest one through swapping the then future dips into present rallies and back.

  • Posted by gillies

    i think there is a second leg down to this crisis. one of the ingredients of the long boom was growing complacency. that is not coming back. oil and property go up for ever ? no one believes that, not for the time being, anyway. everyone is too polite to mention the most effective way of economising on oil use which is mass unemployment.
    you can rebuild cities to be pedestrian friendly, compact and car free – but it is easier for a country on the verge of building infrastructure, as opposed to a country replacing existing infrastructure.
    there might be a renaissance in italian hill towns. i would not expect one for a while in flint, michigan.
    oil at $60 is a bear market rally for speculators. from here it’s either a price decline or more storage tanks, or more ships at anchor to act as storage.
    our irish economy is to contract at 11% over two years. that’s if nothing bad happens !
    i feel that the u s deficit will not be ‘solved.’ attention will drift to some new problem, like rising interest rates causing a home grown savings glut. something like that.

  • Posted by don

    Informative post. Bob in MA, you cite one of my favorite observations. Let’s hope Treasury doesn’t go insolvent.
    I am wating to see if China keeps its peg, or tries to devalue. Maybe a desire to do so was behind the talk about moving from a dollar standard.
    My instinct tells me a drop in car imports from Japan and Germany are a noticeable part of the trade balance improvement.
    The U.S. needs Pigou taxes on oil. The country is really behind the curve on that one. The consumption incentives are aggravating.

  • Posted by HZ

    Without excessive credit generation, we won’t get massive c/a imbalance even with a distorted fx regime. We would get suboptimal trade volume/structure.
    The way I think about this is: assuming lending is rationally based upon borrowers’ future cash flow projections, in aggregate massive deficit would subtract from that cash flow projection (whatever the fx level is at) and therefore should be self-correcting (at least for the private sector). So fx can’t explain why the c/a deficit exploded while the fiscal deficit did not.

  • Posted by Too Much Fed

    bsetser responds:
    “too much fed — I think there has been a slight fall in the bilateral deficit with china, though less of a fall than with the big auto exporters (us imports from china are down far less than us imports from Japan)”

    Notice that the two biggest items to experience big quantity decreases, vehicles and housing, also require the most DEBT to purchase for consumers. Some people can still afford the lower priced items from china and oil although there have been some cutbacks.

    Is the “monthly payment consumer” in trouble with interest payments because of negative real earnings growth?

  • Posted by ReformerRay

    Not receiving any help on my question of the composition of the import reduction in the U.S., I compared the composition of imports into the U.S. for the two months of April – May of 2009 to the two months of July – August of 2008.

    Result: The import decline is primarily in goods that are inputs into production, not consumption. Auto goods and consumer goods accounted for only 22% of the decline. Industrial Supplies and Capital Goods accounted for 75% of the decline.

    This tells me that the import decline was created by businesses reducing investment and purchases of inputs into production in anticipation of a recession – depression.

    The realistic conclusion is that this decline in imports will disappear when the economy picks up.