Fewer flatscreen TVs: Consumer cutbacks chop US trade deficit
Apr 13th 2009 5:00PM
Updated Dec 4th 2009 1:09PM
The pronounced recession that has created hardships in every quarter of U.S. society has led to one long-term benefit for the U.S. economy: a decreasing trade deficit. This will benefit the U.S. economy long-term if the present trend of lower imports continues. The other side of the ledger -- exports, which although still growing are now growing anemically -- are expected to accelerate once the economy starts to recover.
Imports fell sharply again in February, down 5.1 percent to $152.7 billion, according to U.S. Commerce Department data. When weighed against the month's 1.6 percent increase in exports to $126.8 billion, that brought the trade deficit to $26 billion -- the lowest monthly deficit since 1999. Further, the trade deficit is down 58 percent compared to a year ago, with imports plunging 29 percent and exports falling 17 percent during that period.
U.S. consumers continue to tighten belts
What's more, the February import data reveals the astounding consumption cutbacks that have occurred in the U.S. economy since the recession's onset: imports from Japan are now at a 21-year low; from China, at a 3-year low. Three primary factors are leading to the belt-tightening numbers: 1) a high U.S. unemployment rate of 8.5 percent simply means there's a smaller employed workforce capable of supporting consumer purchases; 2) those Americans capable of consuming have taken a "frugal consumer" approach -- cutting back on both discretionary and luxury purchases; and 3) the nation's bill for imported oil has declined substantially, following the collapse in the price of oil. The average price for imported oil per barrel fell to $39.22 in February, compared to $84.76 a year ago.
Economists prefer that a nation run a trade surplus as opposed to a trade deficit, as it usually implies that a nation's goods are competitive on the world stage, its citizens are not consuming too much, and that it's amassing capital for future investment and economic goals.
The end of overspending
Some investors may wonder why one should expect exports to recover but imports to not rebound at the same rate when the recovery starts. The reason is that the U.S. consumer is tapped-out: Americans overspent -- in many cases using home equity loans stemming from bubblish home values to facilitate consumption -- and in the process amassed too much debt, particularly credit card debt. Paying down that debt, combined with increased savings to build a safety cushion against continued U.S. economic doldrums and to rebuild asset levels devastated by the 2008 stock market plunge, all point to a continued, cautious buying pattern by U.S. citizens, even after the economic recovery starts. That suggests a difficult time for imports. It's an era economist Peter Dawson has labeled the era of the "frugal consumer."
Of course, if the U.S. economy enters a period of giddy growth, consumption could rise, and exceed economists' expectation, but right now the consensus sees a mild, slow economic recovery for the U.S. -- there's nothing on the horizon that suggests a major economic boom is ahead.
Economic Analysis: In the above decreasing monthly import total one can see one of the global economy's structural imbalances -- hyperconsumption by Americans -- starting to correct itself, and it's long overdue. Sooner or later, economics would demonstrate that the world simply could not rely on U.S. consumers' buying things to drive global GDP growth indefinitely. The protracted, sustained pullback by stateside consumers are now dispelling the "ship-it-to-the-west" growth thesis. The world must now replace that reduced consumption with increased consumption in emerging markets (particularly in China, India, Brazil, and the Middle East), and in other developed world zones, such as the European Union. Further, only after the world has multiple sources of consumption will it return to a sustainable growth track.
For investors, reduced U.S. consumption provides further evidence that the U.S. economy in the new era (the post-financial crisis era) will be one characterized by commerce based more on production, quality of life, and infrastructure concerns, and less on consumer goods. That transition will take a decade (or more) and will not be without pain and company/sector dislocation, but ultimately it will lead to a more productive, more capital-rich, and balanced U.S. economy.