Saturday, October 14, 2006

Some Implications of the $70 billion U.S. Trade Deficit

The U.S. trade deficit reached a record $69.9 billion in August 2006, higher than most analysts had expected. What are the implications of this:

1) I always thought Nouriel Roubini's forecast of 1-1.5% third quarter growth in the U.S. economy was too low, but with this number it appears possible. I still think it will come closer to 2% than 1.5%, but after this number it certainly appears more likely to be below than above 2%.

2) The trade deficit will probably fall in September because of the sharp drop in the price of imported oil. But it will probably still be comfortably above the pre-July 2006 peak of $65 billion, because of the drop in export prices and increase in non-oil import prices. Moreover, U.S. consumers will likely use some of the savings from falling gas prices to buy other imported goods, reducing the deficit reducing effect of falling oil prices.

3) This is another indication that the dollar is overvalued, particularly against the yen. Meanwhile, the Japanese current account surplus continued its rapid increase, driven by both a rising trade surplus and a rising investment income surplus.

4) This is also another indicator that the imbalances of the U.S. economy is continuing to grow despite the weaker housing market. As Doug Noland of Prudent Bear points out in his latest Credit Bubble Bulletin, the relatively weak M2 growth (4-4.5%) underestimates just how loose monetary conditions are. M3, who gives a more accurate picture of monetary conditions have of course been "discontinued" by the Fed because it showed too rapid increases.


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