Will the Trade Deficit Continue to Fall?

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.

Calculated Risk has more, "this month's report definitely surprised me." Update: Menzie Chinn at econbrowser also discusses the trade figures.

Comments

[save_the_rustbelt]

"narrowed in March to 62 billion,..."

Let's not pop the corks quite yet. Multiplu 62 X 12 for the reason.

[Richard]

It always helps to keep your expectations low. At this point, any deficit less than a trillion per year is almost a success story.

[Winslow R.]

It will be interesting to watch the currency adjustment play out. I know this is a narrow view, but when/if GM and Ford become profitable again, my quess is the adjustment will be complete.

[dryfly]

Will the Trade Deficit Continue to Fall?

Only when they stop lending us money.

[dryfly]

Let me rephrase that... the trade deficit WILL continue to fall IF they (foreign CBs) stop lending us money. If they continue to lend & buy dollars, and long rates continue to stay low even while the dollar remains strong... then we'll continue to buy and the deficit will continue to grow.

A lot of ifs... but regardless of the last couple of blips up it appears to be holding.

[yartrebo]

I doubt oil imports are going to stay down. Gasoline consumption is higher vs. last year (it was down for about 6 months after Katrina). US oil production is dropping, as it's done pretty much every year since 1970. There is no reason to believe that oil imports will stop their relentless rise now.

Also, a broadly weaker dollar might very well cause the trade deficit to get larger for quite some time. Some industries are 100% met by imports. Many others are almost entirely met by imports. If the price of imports increases, we'll mostly just eat them, buying slightly less (because they're more expensive, not because we're buying domestic) but making up for it by paying more per unit.

This is what really worries my about the US's financial straits, that it might be self-reinforcing and eventually lead to economic collapse (ie., demand destruction) in order to balance the deficit. When our imports are mostly energy and budget goods, it's much harder to balance than when the imports are wine and jewelry.