Summer light: US trade deficit falls to lowest level since 1999
Filed under: Economy, Investing
There weren't many bright data points for investors this week, but the U.S. trade front offered one: the nation's trade deficit fell nine percent to $25.96 billion in May -- its lowest level since 1999, the U.S. Commerce Department announced Friday.
Economists surveyed by Bloomberg News had expected the trade deficit to total $28.8 billion in May. More good news: the April trade deficit was revised to a slightly lower level, to $28.8 billion from $29.2 billion. The trade deficit totaled $28.5 billion in March and $26.0 billion in February.
Exports unexpectedly increase
Further, exports unexpectedly rose 1.3 percent to $123.3 billion -- something few economists forecast, given weak demand conditions internationally. Sales of industrial machinery, capital goods, chemicals, consumer goods, and petroleum products led the way.
Meanwhile, imports continued their downward arc, pushed lower by belt-tightening U.S. consumers. Imports fell 0.6 percent to $149.3 billion. Imports declined in industrial materials, consumer goods, autos, and auto parts. The U.S. also imported less oil in May -- an average of 8.4 million barrels per day (bpd) -- that item's lowest average level since September 2008.
The nation's trade deficit has declined for about one year. The pronounced recession that has created hardship and havoc in every quartile of U.S. society has led to one long-term benefit for the U.S. economy: a decreasing trade deficit, which results in less loss of U.S. wealth to foreign sources.
Zach Pandl, an economist with Nomura International Securities in New York, likes the export tone of the May report.
"Orders for durables in the past few months have picked up and some of that demand is coming from overseas," Pandl told Bloomberg News Friday.
Also in May, the U.S.'s trade deficit with the European Union plunged 48 percent to $2.8 billion; however, the deficit rose slightly with China, to $17.5 billion from $16.8 billion in April.
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.
Economic Analysis: The nation's trade deficit picture continues to improve. Clearly, Americans are cutting back their consumer goods purchases, and it's reflected in the steadily declining import total. The hyper-consumption that characterized the leveraging bubble era was unsustainable and has ended, and the era of the "frugal consumer" is well underway.
Further, a likely, lower average price for imported oil in the months ahead will further lower the deficit. Moreover, if the dollar does not appreciate substantially (not likely), sales of U.S. goods to foreign buyers should get a modest tailwind as the global recovery starts, and there is a decent chance the U.S. could start running a monthly trade surplus in late 2010. Significance? That will keep more dollars at home, re-circulating in the American economy, aiding investment and helping to create domestic jobs.
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Reader Comments (Page 1 of 1)
7-11-2009 @ 8:46AM
Pete Murphy said...
There's less good news here than meets the eye. First of all, the decline in imports is due solely to the recession - not a good way to improve the balance of trade. If and when the recession ends, imports will jump right back up.
The increase in exports in May was due mostly to an increase in the category of "industrial supplies and materials" (what you called "industrial machinery"). This category includes petroleum products and most of the increase in the exports of industrial supplies and materials was due to an increase in petroleum exports. (Yes, the U.S. does export petroleum products.) Much of the remainder can be explained by inflation.
To suggest that the U.S. could begin experiencing a monthly trade surplus at some point in 2010 is preposterous. Changes in currency valuation will have no meaningful impact on our trade balance. It never has. As an example, in the last four decades the Japanese yen has appreciated by over 300%. Yet, in that same time frame, our trade deficit with Japan soared. More recently, the Chinese yuan has appreciated by over 20% but our trade deficit with China has also soared.
Currency valuation has little impact on the U.S. trade balance because our trade deficit in manufactured goods is driven by disparities in population density. At this point, I should stop and introduce myself. I am the author of a self-published book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption of products begins to decline out of the need to conserve space. People who live in crowded conditions simply don’t have enough space to use and store many products. This declining per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy regarding population (especially immigration) and trade. The population implication may be obvious, buy why trade? It's because when we engage in free trade in manufactured goods with nations that are much more densely populated than our own, we actually import this population density-driven effect on unemployment and poverty. We become one nation economically. The manufacturing work is spread evenly across the new, combined labor force. But, while the more densely populated nation gets free access to our healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption (if we get access to their market at all). The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide. No amount of productivity improvement or dollar devaluation can have any significant impact because none of these alter the fundamental problem - the disparity in population density and the disparity in our markets.
As a result, our enormous trade deficit persists. We have established a host-parasite relationship between the U.S. and these over-populated nations. It's a virtual global trade welfare state. We finance it through a sell-off of American assets. What will happen when those assets are depleted? The prospects are scary. I believe that the current recession is just a precursor for what's to come.
If you’re interested in learning more about this important new economic theory, I invite you to visit my web site at OpenWindowPublishingCo.com. There you can read the preface for free, join in my blog discussion and, of course, purchase the book if you like. (It’s also available at Amazon.com.)
Please forgive me for the somewhat “spammish” nature of the previous paragraph. You have an outstanding blog going here. Keep up your efforts to raise concern about our nation's misguided economic policies!
Pete Murphy
Author, Five Short Blasts
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