U.S. Trade Deficit Edged HigherAs Revision Impact On Data Is Minor

The ‘what’ of trade in April: The U.S. trade deficit widened modestly in April as exports declined and imports moved lower despite a bump up from oil imports. The U.S. deficit in international trade of goods and services increased to $29.16 billion from a revised $28.53 billion in March. The March trade gap was originally reported as $27.58 billion. There is not much in the report that is significantly different from market expectations this month. But the shifting in trends is important.

Perspective: The June deficit was in line with Wall Street expectations for a $29 billion shortfall. U.S. exports in April fell 2.3% to $121.11 billion: that is the lowest level since July 2006. Imports decreased to their lowest level since September 2004, as they fell 1.4% to $150.28 billion.

The Oil factor: The U.S. bill for crude oil imports in April rose to $13.63 billion from $11.98 billion the month before as oil prices rebounded. The average price per barrel climbed to $46.60 from $41.36 the previous month. Crude import volumes rose to 292.60 million barrels from 289.69 million further boosting the oil import total.

Trade, an unintended engine of growth: Trade has been one of the most powerful buffering factors to declining US GDP. It is one of the so-called automatic stabilizers. Imports are linked to GDP through a high import responsive relationship (called an ‘elasticity’) that implies that imports fall nearly twice as fast as GDP when it drops. Since imports subtract from GDP a decline in imports boosts GDP. Through this channel trade has buffered the GDP decline. Some of that buffering was eaten up by exports which respond, but with less sensitivity, to foreign GDP growth as foreign GDP and exports have dropped too.

Trade arithmetic meets economic impact - a paradox: Trade is a complicating factor in understanding GDP since when imports drop they boost GDP but - at the same time - weak imports imply a weak underlying GDP. Basically dropping imports are not a good sign for US growth even though they will boost it. Since so many consumer goods are imported, falling imports also are often associated with weak inventories and when inventories drop GDP is made weaker. These relationships play out in the GDP accounts and you can see them playing out in this cycle. When we cut through the arithmetic of the trade account and its myriad relationships the economic import is clear. The deficit stabilized around $60 billion per month in the second and third quarter of last year. By December the monthly red ink had declined to -$41.6 bil and by Feb it reached its deficit low point at -$26.08 bil. Over the past two months it is edging higher. That is bad news for the deficit but good news for growth. US exports are stirring (in the sense of falling more slowly), but imports are diminishing their rate of decline faster hence the deficit expands. Some of that is oil. Rising oil prices remind us of the inflation risk as the world economy reflates. The bottom line is that trade arithmetic is often at odds with GDP fundamentals. The incipient rise in the US deficit is good news. At some point the US will have to find a way to blunt its appetite for imports. Putting domestic automakers out of business is not the way to do that. The survival and beefing up of US industry, changing consumer habits, and finding an energy work-around will be part of the solution. And it will be a slow process.

In April three of five large EU countries experienced monthly increases in industrial production. We can set Spain aside, to some extent, since its monthly figures are so volatile. Still, Spain and the UK are the only two of this group to have IP also up over three months. Only Spain shows IP’s negative growth rates as steadily decelerating from 12 months to six months to three months, and finally turning positive. The UK’s positive numbers over three months come without the persistence of deceleration. All countries in this group except Italy show that the IP drop is decelerating (or that it is rising) over three-months compared to six months. And although for Italy the calculation is a close one, over three months Italy’s IP is falling at a faster rate than it is falling over 12-mnths; it is the only country like that.

On balance there is power in numbers and a number of countries did report an IP bounce in April. That makes the bounce look like a real phenomenon, not just something aberrant. Most show various evidence that the IP deceleration is slowing in the recent three-months. Italy is the exception. Despite posting a rise in IP in April its trends still are not reassuring. Spain, despite the extreme volatility in its index shows the most persisting deceleration in the group. The trick for Spain will be to see if that trend stays in place next month. The challenge for Italy is to join the progress in the rest of the group.