Friday, May 12, 2006

Decline in U.S. Trade Deficit Likely An Abberation

The U.S. Trade deficit unexpectedly declined in March to $62.0 billion from $65.6 billion in February, contrary to expectations from me and most other analysts that it would rise. This largely reflects the somewhat curious fact that the price actually paid of imported oil fell during that month, even though the traded market price rose sharply. But this of course reflects that the price paid for oil was set in previous months. In coming months, prices actually paid will increase to market price levels which is currently more than $20 per barrel higher than the $52.26 paid on average. That alone will ultimately raise the monthly trade deficit with more than $6 billion per month. The full effect of this will not be evident until May or June, but already in April this was enough to raise the import price index by 2.1%.

Another factor which indicates that the trade deficit will rise sharply from the March low is that China's trade surplus rose sharply in April.

Even so, this decline still means that first quarter growth will likely be upwardly revised, although the extent (if any) of this depends on how other components are revised. It should however be noted that as the BEA assumed a decline in the trade deficit, the contribution from trade will be limited. The BEA assumption was for a $1.3 billion decline, whereas the preliminary number was $3.8 billion (including the $0.1 billion downward revision of the February deficit). The $2.5 billion discrepancy in a $3.25 trillion quartely GDP is 0.08% or 0.3% at an annual rate. Assuming zero net revisions in other components, this implies a revision from 4.8% to 5.1%.

UPDATE: According to this Marketwatch article inventories, business investments and construction spending have also been stronger than expected, all of which according to the article would raise the number to 6% or more. At the same time however, personal income growth have been revised down.


Anonymous Ames Tiedeman said...

The U.S. Trade Deficit is a huge problem. We will either end up being owned by foreigners or we will simply fade away. Both prospects are quite un-
American. Some basic facts: The U.S. has not had a trade surplus with the world since 1974. We have not had a trade surplus with Japan since April of 1976. We stopped having trade surpluses with Eurpoe in 1983. Fifteen years ago we did not have a trade deficit with China. Now we have a 250 Billion a year deficit with the People's Republic. A nation that does not make anything is a worthless nation. Worse, the longer we go without making the needed investments in our manufacturing infrastructure, the more knowledge we lose. We will either forget how to manufacture or we will simply not be good at it. Our creative energy fades away if we do not use it. Also, it is innate to want to make things. Kids play in sand boxes, youg men build tree forts. This is human nature. All of this is being taken away from the American people by idiots in Washington who do not know how to make trade deals. I may write a book on this topic.

12:19 AM  

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