The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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September 12, 2006

How To Interpret the Trade Deficit?

If you were wondering how to answer that question, you can't do a lot better than to read Brad Setser, or Calculated Risk, or Menzie Chinn.  I sense, however, some disagreement.  Brad says this..

This month’s data suggests that the economy hasn’t slowed enough to end all import growth.   Non-oil goods imports rose to $130b.   Barring the recession Nouriel is now forecasting, I would expect non-oil imports to continue to trend up over the course of the year.

... but Menzie concludes...

One noteworthy point is that the non-oil trade deficit has continued its stabilization in nominal terms (as mentioned in my post on the May 2006 trade figures as well as this post based on the NIPA data), so in terms relative to GDP, it has fallen.

The [Bloomberg article] cites the continued strength of the consumer. The month-on-month figures don't support that contention -- although the quarter-on-quarter growth rates would indicate some growth.

... and CR seems to agree:

It appears the trade deficit, excluding petroleum, might have stabilized... This might indicate a slowing U.S. economy and is consistent with a slowdown in the U.S. housing market.

A little help?  Not from the expert commentary in the MSM.  The Wall Street Journal has a lot of folks doing arithmetic:

... The July real-goods trade deficit widened compared to its [second quarter] average, suggesting that net exports will subtract modestly from [third quarter] GDP.
--Steven Wood, Insight Economics

... While it seems reasonable to think that the upward trend in exports will resume in August and September, the wider July gap makes it more likely that the trade accounts will exert a bit of a drag on [third-quarter] GDP growth for the first time this year.
--Nomura Economics Research

Based on the much-larger-than-expected deterioration in the overall trade gap, we now see net exports subtracting 0.4 percentage point from [third quarter] GDP growth, down from our prior estimate of a 0.3 percentage point addition....
--Morgan Stanley U.S. Economics

Well, all else fixed I guess that's so, but there is also this, from the aforementioned Bloomberg article:

A growing appetite for Japanese electronics and clothing from China suggests American consumers are still spending even as the housing market sags, and that the U.S. economy needn't rely on foreign demand to fuel the expansion...

"As long as the consumer is relatively healthy, we're going to see a wide trade deficit,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

And, presumably, that would be the sign of a relatively healthy economy.  Is it possible we should be adding points back on to our growth forecasts?

What does this all add up to?  Pretty simple,really.  The economic environment is a total murk, and everyone is just guessing.  In other words, nothing unusual.

September 12, 2006 in Data Releases , Trade Deficit | Permalink


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If you look at the real consumption numbers it is hard to find many signs of weak spending outside of autos.

Since 1990, autos and energy have accounted for some 10% to 11% of total personal consumption expenditures (PCE) and since 2002 as energy has grown from 4.2% to 6.1 % of PCE auto sales have slipped from 6.3% to 4.8% of PCE—almost a one-for-one adjustment. It looks like the adjustment to higher oil prices has been almost completely limited to autos.

For example, while real retail sales growth has slipped to some 2%, excluding autos it is still
8.7% -- one of the largest spreads I have ever seen. Real PCE excluding autos and energy is still growing at a 6.25% rate.

Meanwhile, real nonoil imports are still growing at a 7.1% rate as compared to the recent low point of some 5.8% in August 2005.

Posted by: spencer | September 13, 2006 at 09:53 AM

Good points, Spencer.

Posted by: Movie Guy | September 13, 2006 at 01:19 PM

Two points not addressed:

1. Growing transference of higher technology production to China/Asia. In other words, we're going to be importing a wider range of goods from China/Asia/wherever else.

The growth in offshoring will continue under current U.S. trade policy, currency valuation regimes, and transnational corporate decisions. Hence, import type goods growth or product spread will increase.

2. What's the status of outstanding consumer credit right now? Should be rising, right? Go back to school expenditures and so forth...

Posted by: Movie Guy | September 13, 2006 at 01:24 PM

"The economic environment is a total murk, and everyone is just guessing. In other words, nothing unusual."

Basically agree, though I might tilt a little bit more in the direction of the slowdwon argument.

Things in Europe are starting to get interesting again, and as we move into 2007 there will be a lot to keep an eye on. In particlar fiscal tightening and the Stability and Growth Pact.

An interesting debate is going on at present over the sustainability of Italy's debt.

New EU Blogger Sebastian at Eurozone Watch Blog started it off. Claus Vistesen at Alpha Sources, Felix at RME and yours truly at Afoe then all piled in.

Maybe the best starting point is this from Sebastian:


Posted by: Edward Hugh | September 14, 2006 at 05:35 AM

spencer - I agree. We'll see how today's Aug. retail erport shakes out -- the expectation is that ex-auto sales held up.

mg -- The latest consumer credit figures we have are from July. Growth was about on pace with the first quarter, but that's after big jumps in May and June.

Edward -- Welcome back! I've been keenly following the whole discussion on Italy and legal implications of departing the EMU. (Including your post from yesterday). I plan a round-up post this weekend.

Posted by: Dave Altig | September 14, 2006 at 06:39 AM

In looking at nominal retail sales do not make the mistake of trying to deflate by the CPI to convert to real numbers.The deflator for GAFO sales -- department store type merchandise -- is running at a
minus 2.3 rate year over year and minus 3.6% on a 3 month basis.

This implies that when WMT reports 2-3% same store sales gain the real gain is more like 5%-6%.

Posted by: spencer | September 14, 2006 at 10:08 AM

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