Friday, January 11, 2008

U.S. Trade Deficit Growing Again

After falling, and being down some $10 billion per month, for most of 2007, the U.S. trade deficit is again growing. It rose to $63.1 billion in November 2007, up from $57.8 billion in October 2007 and $58.5 billion in November 2006.

There were two reasons for this increase. One was of course the effect of rising oil prices. The average price of oil rose from $71 per barrel to $79, an increase that added nearly $3 billion to the deficit. The price used is as you can see a lot lower than the market prices of $90-$100 of that period. The reason for this is that a lot of the shipments are based on futures contracts signed months earlier. However, eventually the price of shipments will catch up, so we can expect the cost of imported oil to continue to rise in coming months.

The other factor was the unexpected surge in consumer spending during November, which rose 0.5% in real terms even though real disposable income fell 0.3%. As consumers increased their spending a lot faster than income, and as no increase in savings among corporations and government, this had to be financed by borrowing from foreigners, or in other words a higher trade deficit.

This in turn implies that the positive effect on GDP from that spending increase will be limited. Volume growth of GDP will likely be only slightly positive (less than 1%), and terms of trade adjusted real GDP will likely fall.

As reports indicate that consumer spending fell in December, it seems likely that the nonpetroleum trade deficit again fell back in December. The overall deficit will probably decline too, but by a lot less as the lagged effect of higher oil prices continues to push up the cost of oil imports.


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