U.S. Trade Deficit Shrank With Lower Oil Prices & Recession

The U.S. foreign trade deficit narrowed in September somewhat more than expected. At $56.5B versus an unrevised $59.1B during August, the deficit was its smallest since last October. So far this year the monthly trade deficit has averaged $59.4B, still deeper than the $58.5B averaged during the first nine months of 2007.

Adjusted for price inflation the August trade deficit in goods improved to $39.0B from $40.9B in July. Year-to-date the real deficit has narrowed by $10.0B versus 2007 to an average $46.1B as real exports surged 10.3% and real imports fell 1.2%. A narrower trade deficit was estimated to have added 1.1 percentage points to real GDP growth last quarter following a 2.9 point addition during 2Q.

Lower oil prices helped imports shrink 5.6% after a 2.2% decline during August. Imports of all energy-related products fell 21.4% (+31.9% y/y) as the value of crude petroleum imports fell by more than one quarter. That drop owed to a decline in the average price per barrel of crude oil to $107.58 (+57.2% y/y) from a high of $124.7 in July. The developing U.S. recession prompted a 15.1% decline (-16.2% y/y) in the daily quantity of crude petroleum imports.

Recessionary forces were additionally evident in the 3.6% decline in the value of nonpetroleum imports. Measured in chained 2000 dollars nonoil imports fell 2.7% (-3.7% y/y), pulled lower by a 7.8% decline (-0.9% y/y) in real imports of nonauto consumer goods. The chained dollar value of imports of automotive vehicles & parts also fell by another 3.7% (-17.9% y/y). Real imports of nonauto capital goods reversed their August decline and rose 1.5% (0.9% y/y).

Services imports reversed past strength and fell 3.4% (+6.7% y/y). Travel imports fell by 2.7% with the developing economic weakness (+4.0% y/y) while passenger fares fell 3.9% (+5.8% y/y). Both of these y/y increases are down sharply, from 12% for travel and from 20% for passenger fares, as of early this year.

As economies abroad weakened exports fell by 6.0% (+8.8% y/y) during September. The decline reflected an 8.3% drop in goods exports. Adjusted for prices, chained dollar goods exports fell 7.8% (+2.3% y/y) led lower by a 9.6% (-0.8% y/y) drop in capital goods. Exports of autos & parts fell 1.4% (-2.0% y/y) after their 13.9% August plunge while real exports of nonauto consumer goods fell 3.3% (+4.7% y/y) on the heels of their 5.9% August drop. Adding to this weakness was a 10.8% (-5.4% y/y) drop in real exports of foods, feeds & beverages.

Nominal exports of services ticked 0.1% lower (+9.3% y/y) as travel exports fell 2.3% (+16.7% y/y). Passenger fares slipped 0.6% (+31.0% y/y). Exports of "other" private services have deteriorated markedly but ticked up 1.6% during September. Year-to-year growth fell to 4.7% after an 18.2% gain during all of last year.

The U.S. trade deficit in goods with China deepened to a record $27.8B and during the first nine months of this year averaged $21.7B versus $20.8B during the first nine months of 2007. Exports to China fell 18.2% last month (-5.1% y/y) after 18.2% growth during all of last year and imports rose 3.9% (12.5% y/y). The trade deficit with Japan deepened to $5.6B but during the first nine months of this year it is down to average of $6.3B from an average $6.8B during the first nine months of last year.

To start Fiscal Year 2009, the U.S. government's budget deficit for October reflected the duel of effects from a U.S. recession and the War in Iraq.The monthly deficit jumped to $237.2B, more than four times last year's deficit of $56.8B. October's figure also was more than double Consensus projections for a deficit of $99.2B.

Many forecasts for the budget deficit during all of this fiscal year are near $700B. If realized, that would swell the deficit to about 5% of GDP following last year's roughly 3.2% and FY07's marginal 1.2%.

Net revenues during October suffered greatly and fell 7.5% from last year. Higher unemployment took the steam out of individual income tax receipts and they fell 9.7% from last October. Lingering payouts of the Government's "stimulus" checks reduced revenues somewhat. However the big negative factor would have been that payroll employment, and thus tax receipts, fell roughly 1.0% y/y. Suffering even more were corporate tax receipts which nearly evaporated with huge stated losses. Growth in unemployment and social insurance taxes grew a reduced 3.7%, the least since 2004.

U.S. government outlays nearly doubled versus last November lifted mostly by a jump in the "commerce & housing credit". Defense spending (19% of total outlays) rose an accelerated 17.9%. The gain does not reflect the full cost of the resources devoted to Iraq & Afghanistan since much of the spending would have occurred anyway. Medicare expenditures (12% of outlays) rose by nearly one-half but that followed an October decline Social security spending (21% of outlays) rose 6% after 6.8% growth last year. Net interest payments increased 4.3% y/y.

The Government's financial data are available in Haver's USECON database, with extensive detail available in the specialized GOVFIN.

The weakening job market pushed initial claims for jobless insurance above 500,000 for the first time since they were briefly there; late during the recession of 2001 and just after the 9/11 terrorist attacks. At 516,000, claims rose last week from an upwardly revised reading of 484,000 during the prior period. Expectations had been for 479,000 claims. The four-week moving average of initial claims rose to this cycle's high of 491,000 (48.0% y/y).

The largest increases in initial claims for the week ending Nov. 1 were in Ohio (+3,885), Michigan (+2,619), Pennsylvania (+2,155), Wisconsin (+2,119), and Arizona (+1,692), while the largest decreases were in California (-3,603), Florida (-2,327), Nevada (-943), South Carolina (-824), and Indiana (-621).

Continuing claims for unemployment insurance during the week of November 1 rose another 65,000 after the prior week's 111,000 upward spurt. The four-week average of continuing claims rose to 3,794,000, this cycle's high and the highest since 1983. Continuing claims provide some indication of workers' ability to find employment and they lag the initial claims figures by one week.

The insured rate of unemployment rose to a new cycle high of 2.9%. The Commerce Department indicated that the highest insured unemployment rates in the week ending October 25 were in Puerto Rico (5.1 percent), Oregon (3.7), Nevada (3.6), Michigan (3.5), California (3.4), New Jersey (3.3), South Carolina (3.3), Pennsylvania (3.2), Arkansas (3.1), Alaska (3.0), and North Carolina (3.0).

German GDP drops -German GDP drops by 2.1% saar in 2008-Q3. As has been the case in Germany for sometime, the Bundesbank continues to blame the thrust of events on outside forces. Germany's Bundesbank said that the global growth slowdown was to blame for Germany slipping into recession this year, after gross domestic product data on Thursday showed that its economy shrank by 0.5 percent in the third quarter of the year.

Germany as Victim: "National production in Germany has significantly fallen in the summer ... compared to the previous quarter. The broad global economic slowdown is now increasingly making its presence felt," the German central bank said in a statement.

Germany as free rider - There is no disputing these facts but the Bundesbank does not point out that Germany has an economy geared to exporting and one that therefore is set to do better when the world economy does better and to do worse when the world economy does worse. Blaming the world economy in this circumstance is like the caboose blaming the engine for going too slow. This arrangement is one that Germany has sought and has prospered under in the past. Now that it is not working, it is not Germany’s fault. Right.

Germany as braggart laggard - In the chart at the top of this report notice that the RED German GDP line usually exceeds the blue line. The red line is for all of GDP. The blue line is for German domestic demand alone. Germany has been pulled ahead by the global economy consistently since 2003. I don’t understand all this complaining and the ongoing assertion of German superiority we have been hearing from the Bundesbank, from the German finance ministry and others. It has been about growth, the euro and German banks - everything.

Giving or taking? No one forced German banks to buy and hold the bad assets they have accumulated. Yet they did that and suffered after the Bundesbank assured us that German banks had no such problem. Germany is an intrinsically slow growing economy with a high rate of unemployment. Its choice has been to accept that and to seek growth through exports instead of though domestic means. At a time that the US has had a big payments imbalance, and developing countries were pursuing strategies of export-led growth, Germany would have contributed to the world economy more by putting its unemployed to work and by exporting less.

Global summit and blame: We are preparing for a global summit where countries will sit across the table from one another and listen to the pot calling the kettle black. Be sure that there will be a lot of blaming and evading of blame at this G-20 meeting. But be clear that as the center country in a currency system like this, if countries choose a lower rate VS the dollar, they get it, and the US gets the resulting deficit from trade.

What to fix: The currency monetary system is not set up to encourage currencies to trade at their proper parities or to remedy balance of payments imbalances when they arise. Breton Woods collapsed because of disputes arising over payments imbalances and the US tendency to grow faster than its trading partners (…and amass deficits and lose gold reserves). And now some 35 years later these same root differences are the nemesis of the Bretton Woods’ successor system of fluctuating exchange rates. It’s not a matter of ‘is Germany better’ but rather ‘is it doing its share?’ Is it contributing to the world order or is it adding to the burden or the excess? That is the real question.