Trade figures were released today and the trade deficit unexpectedly narrowed in March to 62 billion, the second month in a row the deficit has narrowed. We didn't have to borrow as much as we thought we would. However, Brad Setser says to be careful in the interpretation of the headline number. We have not necessarily turned the corner towards more balanced trade:
Brad Setser: Not quite as good as they look (the March trade numbers): That is my initial take on the March US trade numbers.
China didn't surprise ... It posted another $10 billion plus trade surplus in April -- $10.5 precisely. Exports were up 23.9% y/y; imports increased by a much smaller 15.3% y/y. For all the talk about rebalancing Chinese growth, the data so far suggest that China is becoming more, not less, dependent on exports - and that its trade surplus is poised to increase further.
The US trade deficit dipped to $62 billion in March. That wasn't expected. Certainly not by me. ... The deficit improved because of strong exports. The export numbers are as good as they look. Broad across the board gains. Aircraft are doing fine - the US exported about $10b of planes in q1, v $6b a year ago. But Boeing didn't drive the data. March aircraft exports were a bit below February exports. The US sold a lot more electronics.
And the deficit improved because of an unusual fall off in imports. Non-oil goods imports did not bounce back strongly from their February total ... I had expected a higher number, something a bit closer to the (high) January number ... I wonder a bit about the seasonal adjustment...
But the main reason for the better-than-expected deficit: oil
That's right. Oil. Oil imports fell. Seasonally adjusted petroleum imports fell by about $2 billion in March. Seasonally adjusted imports of "industrial supplies" - a category that includes crude oil, gas and host of other raw materials - fell by $3.3b. ...
Some of it may be that the seasonal adjustment is a bit off. But not all of it. I always like to look at Exhibit 17 of the trade report. It is the data on oil imports in its rawest form. And it turns out that the US imported less oil this March than last March: 397,983 thousand barrels v. 420,260 thousand barrels. And the US imported less oil in the first quarter of 2006 than in the first quarter of 2005: 1,192,492 thousand barrels v 1,226,459 thousand barrels. For the quarter, that is a fall of 2.75%.
Maybe higher prices are having an impact. That is the good news. The bad news: the March import price of $52.26 a barrel (a bit below February) is not going to last. And I hope that inventories were high despite the fall off in imports ... otherwise, April isn't going to be pretty.
We all sort of know that the April trade number will be worse than March. But there are two things to watch in particular. One, obviously, is the size of the bounceback in oil imports. Not just in nominal terms. But also in volume terms. If higher prices lead the US to cut back on the quantity imported, that will help ... not a lot, but some.
And non-oil imports. They marched up quite strongly in the fourth quarter and then blew out in January. Now they consolidated a bit - but the trend here is something to watch. For the quarter, non-oil imports were up 10.5% y/y. ... The February and March combined y/y growth number is a bit over 10% -- not quite as high as January's 11.3%, but enough to give me pause. 10% growth in non-oil imports implies a higher deficit. Simple as that. I want to see stronger evidence that non-oil import growth is starting to slow before saying the trade deficit has turned the corner.