December 14, 2005
October trade balance numbers
At the tail ends of the distribution of expectations
Dec. 14 (Bloomberg) -- The U.S. trade deficit unexpectedly widened to a record $68.9 billion in October, as imports of crude oil, automobiles and televisions increased, a government report showed.
The gap in goods and services trade reported by the Commerce Department today exceeded even the highest estimate in a Bloomberg News survey of economists. In September, the shortfall was $66 billion. Imports rose 2.7 percent and exports increased 1.7 percent in October. The U.S. had record deficits with China, Canada and Mexico.
In fact the Bloomberg consensus was at $62.8, so the $68.9 figure exceeds the consensus by 9.7%, indeed a big surprise.
The article continues, tracing out implications for GDP in q4:
Still, the wider U.S. gap may restrain economic growth this quarter, economists said. The deficit averaged $61.1 billion in the third quarter and subtracted 0.25 percentage point from gross domestic product.
Posted by Menzie Chinn at December 14, 2005 07:36 AMdigg this | reddit
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» Trade Deficit Hits Record in October from U.S. Politics: Current Events
The Financial Times reports that the US trade deficit hit a new high in October, “confounding Wall Street expectations forecasts that it would fall and suggesting trade will be a bigger-than-expected drag on economic growth in the fourth quarter... [Read More]
Tracked on December 15, 2005 01:36 AM
I have heard that this is the largest nominal trade deficit on record. Is that true? If so, is it the largest real trade deficit on record as well?
Posted by: sjp at December 14, 2005 09:45 AM
"I have heard that this is the largest nominal trade deficit on record."
If that's true, then this would also be the largest capital account surplus on record, right? Couldn't that be interpreted to mean that the U.S. economy is offering relatively attractive investment opportunities to foreign investors?
Posted by: JohnDewey at December 14, 2005 11:17 AM
So even the experts can be nearly 10% off, underestimating the appeal of TV sets, cars and crude oil? Did they forget about Christmas? Did they underestimate the MEWs of the recent past? Good thing we have those tariffs on China.
Lastly, those MNCs in China but headquartered here, making products 'made in China' gets stamped in a clear and unambiguous way, but the component in the Japanese TV set may not be so clear, yes? What of those smaller modules that are assembled in China shipped to Korea for modular packaging and then to Japan for final assembly and testing before landing on our shores?
Can we attach some margin of error to these imports/exports?
Posted by: calmo at December 14, 2005 12:05 PM
"the U.S. economy is offering relatively attractive investment opportunities"
More likely that the U.S. government is offering attractive lending opportunities and the U.S. consumer attractive consumption opportunities.
Posted by: Lord at December 14, 2005 12:24 PM
You're right, up to minor differences between the current account and the int'l trade figures. Your question (actually, a "yes" answer to it) is the basis of Bernanke's "global glut of savings" argument. That is, at least part of the big US trade deficits lately is due to global investors getting better returns here than elsewhere.
Another aspect of this release to keep in mind is that the trade deficit is the difference between two pretty big flows -- $100bn exports & $170bn imports. I personally find it more informative to look at the deficit/gdp ratio -- in fact I'm a bit surprised to see that this isn't reported. A quick & dirty estimate of this is about 2.2% -- $68bn/(1/4 of Q3 nominal GDP) -- which doesn't seem that big to me.
Posted by: Peter Summers at December 14, 2005 12:29 PM
I donīt understand why a trade deficit should restrain growth. Sounds ridiculous. If it were true, the opposite (a surplus) should spur growth. So, over the years Japan, Europe, etc, should have posted stellar growth. The fact is that people forget the financing side of the ledger (capital account). In the end the growth rate of the economy is the same. What changes is the composition of GDP.
Posted by: JM at December 14, 2005 12:32 PM
You say that a large trade deficit indicates that foreign investors see higher returns here than elsewhere. Maybe, but the evidence is far from strong. While the US is a net debtor to the tune of more than $3 trillion, the net outflow on the investment income part of the IBOP of the US is barely negative. In short, American investments abroad are clearly earning much higher returns than are foreign investments here. Why are not those foreigners able to get those same kinds of returns in their home countries that our investors are somehow able to find?
Posted by: Barkley Rosser at December 14, 2005 12:48 PM
I am pretty sure that Peter Summers' calculation of the defict/GDP ratio is incorrect. I have nominal 3QGDP at an annual 12601B (from the BEA website), which would be only 1050B/month. So the trade deficit for October would be very close to 6.5% of GDP.
Posted by: matt wilbert at December 14, 2005 01:25 PM
Actually, what I meant to say was that Bernanke (and others) see the deficit as an indication of higher US returns. I agree with you that this argument isn't necessarily convincing. I haven't looked at the net investment income data, but you certainly raise a good question.
Posted by: Peter Summers at December 14, 2005 01:27 PM
You're right -- my number is 1 month's deficit/3 months' gdp. Sorry 'bout that!
Posted by: Peter Summers at December 14, 2005 01:33 PM
I don't see the reason for a surprise.
If you raise the USD by raising interest rates, then you get an increase in the trade gap; exports decline, we sell less at a higher price, and imports increase, we buy less at a lower price...
Posted by: Joe Rotger at December 14, 2005 02:18 PM
....and imports increase, we buy more at a lower price...
Posted by: Joe Rotger at December 14, 2005 02:20 PM
Barkley: "American investments abroad are clearly earning much higher returns than are foreign investments here. Why are not those foreigners able to get those same kinds of returns in their home countries that our investors are somehow able to find?"
Doesn't it depend on the home country of the investor?
I think economies of Japan, Germany, Italy, and France are expected to grow only 1% annually. To investors in those countries, perhaps the 3.5 to 4% U.S. GDP growth looks attractive. Though developing countries are growing faster than the U.S., Europeans may perceive U.S. equities and corporate bonds as less risky.
Isn't much of the Chinese investment simply central bank purchases of U.S. treasuries? Buying dollars keeps our currency strong relative to theirs, and their goods remain inexpensive for Americans. The argument is that political stability in China depends on continued U.S. purchases of Chinese goods. Does that make sense?
I read that foreigners want to hold dollars because oil is priced in dollars. Is that a valid argument?
Posted by: Anonymous at December 14, 2005 03:40 PM
To add to my Anonymous post above: Are the Japanese also intervening in currency markets for the same reason? to keep the dollar strong so Americans will buy their goods?
Posted by: JohnDewey at December 14, 2005 03:46 PM
"In short, American investments abroad are clearly earning much higher returns than are foreign investments here. Why are not those foreigners able to get those same kinds of returns in their home countries that our investors are somehow able to find?"
Someone made the point already: a lot of foreigners by U.S. treasuries. This is low risk, low return in the world of investing.
Is it possible that Americans may get better returns abroad due to greater leverage or a difference risk preference (more risk neutral vs. risk-averse)? Not sure.
Posted by: nate at December 14, 2005 07:00 PM
The "selection process" for the U.S. inherently attracted people willing to leave a country and move to another country for unknown prospects. This may be more risky and higher return than staying put in your country of birth. Some of this tolerance for risk may have passed down through the generations in the U.S. So the U.S. may be full of people who are less risk-averse than people in other parts of the world. Not sure. Behavior that is less risk-averse and is more close to risk-neutral may lead to higher overall returns - abroad or domestic. Not sure.
Posted by: nate at December 14, 2005 07:04 PM
My apologies for being absent today after sparking this lively debate. My only excuse is that I divided my day between fighting through snow (I live in Madison, WI) and giving my semester-end lectures.
sjp and JohnDewey: Yes, this is the largest nominal trade deficit. I suspect it is also the largest as a proportion of GDP. Assuming about a 3.5% growth rate in 2005q4, the October trade deficit works out to about 6.5%. While this implies a capital inflow (both private and official), one has to think about the implications for the debt to GDP ratio. After all, Argentina financed its trade deficit with capital inflows up until a couple years before 2000.
Barkley Rosser: I would also be careful about the "higher returns in the US" argument. In fact, it is a consistent finding is that US assets abroad obtain a higher rate of return than assets in the US owned by foreigners. Some of this is due to the fact that US FDI is older than foreign FDI in the US (See the recent CBO "Brief" on this subject:
But it is not clear that this finding for aggregate US liabilities and assets will hold, as US Treasury yields rise. In fact, we may find that it 2005q4 the US net income account will go negative, since a lot of US liabilities take the form of US short term Treasury liabilities.
Nate: For more on the issue of differential returns, see Gourinchas and Rey, "From World Banker to World Venture Capitalist."
JM: A higher level of imports implies both robust economic growth and lower economic growth. Conditional upon given levels of consumption, investment and government spending, higher imports implies lower GDP. One way of thinking about this is we have pretty good and early observations on the domestic components of GDP; the international transactions get tabulated a little later than the others. Hence, observers make their forecasts of GDP knowing C,I,G, and guessing NX. Then lower NX than expected revises downward the GDP forecasts.
Posted by: menzie chinn at December 14, 2005 07:54 PM
Posted by: nate at December 14, 2005 08:14 PM
In my prior life as a banker, the worst situation to be in was when the customer owed us a LOT of money. As the amount of debt increased the degree of control over the situation progressively went over to the borrower's side. The same thing will happen here. The press all talk about the U.S. becoming hostage to the international credit markets. In fact,the reverse is true and will be more so as long as the U.S. keeps borrowing more. The whole concern is a tempest in a teapot,as so many economic subjects.
Posted by: jim miller at December 15, 2005 04:43 AM
"Hence, observers make their forecasts of GDP knowing C,I,G, and guessing NX. Then lower NX than expected revises downward the GDP forecasts"
To me this means that their ORIGINAL forecast, before knowing C,I,G, was WRONG. Once those are known, you are left only with an incomplete accounting identity (missing X-M). The fact remains that ex-ante growth will not be higher or lower because of X-M.
Posted by: JM at December 15, 2005 05:04 AM
Jim Miller: The aphorism has a lot of substance. But that doesn't rule out the possibility that both sides of the deal will suffer -- e.g. Argentina. You may be right that it all turns out to be a tempest in a teapot. But I think the markets will be less sanguine when the end-2005 Net International Investment Position numbers come out in mid-'06, showing at least a 6.5% deterioration in the ratio relative to GDP.
JM: Of course the original forecast was wrong. The probability measure that the original forecast was exactly right is zero unless the variable being forecasted is nonrandom.
I guess this comes down to an issue of whether this process is an "ex ante forecast" or an "estimate". When one is dealing with forecasting in real time using data that arrive with lags, the distinction becomes a little fuzzy. I have to say, I'm not certain that any more sophisticated approaches such as the ones I've read (using VARs with non-synchronized data arrival etc. to forecast) do things any differently in a substantive manner.
Posted by: menzie chinn at December 15, 2005 07:01 AM
Barkley, you asked:
"American investments abroad are clearly earning much higher returns than are foreign investments here. Why are not those foreigners able to get those same kinds of returns in their home countries that our investors are somehow able to find?"
Foreign CBs, in order to avoid appreciating their currencies (if they do have a big trade surplus) prefer to park their growing reserves in secure interest paying instruments, such as: treasuries, MBS, US agency bonds...
Saudi Arabia, China, and such...
Posted by: Joe Rotger at December 15, 2005 08:59 AM
...And of course, CBs are doing this to protect their local employment.
China is a hell of a good example. Since '95 kept its Yuan pegged to the dollar, except for a meager recent 2.1%...
So, the Fed raises interest rates, hence , raising the dollar.
Is this going to help to make US prices more competitive in the world?
Is this helping the US trade balance?
...I don't think so.
The trouble is, the Fed's policy is minimizing inflation; but, if everybody and their mother out there are not following this policy, b/c they're protecting their jobs, then what?
...US debt grows. And, how are we suppossed to pay it with an increasing trade balance?
By raising the US dollar?
Come on, give me a break, my 5 year old can do better!
Posted by: Joe Rotger at December 15, 2005 09:17 AM
Joe Rotger: I think it is useful to remember that in 1997, when the other East Asian economies' currencies depreciated or were devalued, China maintained its peg against the dollar.
It is true the Fed's policy of raising the Fed Funds rate tends to appreciate the dollar, thereby inducing expenditure switching away from US produced goods. But it also tends to reduce domestic absorption (consumption, investment). And to the extent that it deflates the housing bubble faster than it would otherwise shrink, it even further depresses consumption, some of which was on imported goods.
In theory as in practice, then, the Fed's raising of interest rates may have ambiguous effects, with positive and negative effects on the trade deficit prevailing at different horizons. Note also that the J-curve effect further complicates the relationship between domestic interest rates and the dollar value of the trade balance.
By the way, this is why the ideal way to shrink the trade deficit is via fiscal policy, i.e., by shrinking the budget deficit. Taking that action would have an unambiguous effect on the trade deficit.
Posted by: menzie chinn at December 15, 2005 09:43 AM
I am fully aware that much of the "investment" here is in fact by Asian central banks who are not doing it to earn high yields, but in order to manipulate their exchange rates for domestic employment purposes. I was raising the point precisely to respond to the argument that all those foreigners were sending their money here to get all the high returns we have to offer.
It is not necessarily the case that the alternative for the foreigners is to invest in their home countries. So, all those slow growth countries can have investors who invest in other places that are not the US, but have high yields. Again, I do understand that those investments that are earning high yields for the US abroad are old, but why are the foreigners not able to invest in those same sectors and countries as well?
Posted by: Barkley Rosser at December 15, 2005 11:32 AM
Barkley Rosser: Apologies -- I meant my statement to be an affirmation of your position. Sorry to be unclear. By the way, recorded purchases by the official sector seem to have declined relative to 2003-04.
In order to answer the question of why the host country firms can't undertake investment that is as profitable as US-sourced FDI is a good question. The US may have better technology and managerial infrastructure; alternatively, LDC host-country firms may be subject to political pressure (or be state-owned enterprises) that restrict their ability to pursue the profit objective.
Posted by: menzie chinn at December 15, 2005 12:18 PM
On Menzie's comment "... the ideal way to shrink the trade deficit is via fiscal policy, i.e., by shrinking the budget deficit." Are you ambivalent about how this is achieved or do you mean largely through reduced government spending?
Also, any comments on the "Current Account Fact and Fiction" paper on the UWM site?
Posted by: Frank at December 15, 2005 01:52 PM
One of the reasons the FOMC made its move toward neutral in 13 tiny little moves was to give central banks the time and opportunity to adjust. After flooding the world with money after 2001, the FOMC has needed to "un-spike the punch bowl" but it needed the help of others. Finally, even slow growth, high unemployed Euroland raised a quarter.
More help is showing up all over; I think, Switzerland was the last to bump rates. The big wave toward deflation was halted and now the big wave toward inflation is almost under control. Conditions are ripe for several good years in the middle. US short rates will probably not vary much for the next few years. Under such circumstances, the value of the dollar and the trade deficit will gradually adjust; this is not nearly as big a problem as perceived. Boeing has sold about 40 billion of high margin planes to foreign countries in the past few weeks. The maintenance and parts contracts on those planes will counter balance tons of apparel from China over the next 10 years. The correction is already underway!
Posted by: Jack Miller at December 15, 2005 02:02 PM
Frank: Insofar as I believe the impact from spending cuts and tax increases on the trade deficit are roughly the same, I don't recommend one over the other. (I have my own inclination for not extending the 2001 and 2003 tax cuts, mostly because it appears that the Republicans are unable to cut domestic spending. And as long as we wish to remain in Iraq, we need to spend $80 billion per year making fiscal restraint via spending cuts even more difficult. But that is a separate question from what will reduce the trade deficit).
Regarding "Current account fact and fiction", I appreciate their citing of my paper with Eswar Prasad. However, it would have been even better if my more recent paper, with Hiro Ito, which reported estimates of 0.20 for the impact of budget deficits on current account deficits. In fixed effects regressions, we obtain estimates for this coefficient as high as 0.40.
Along these lines, I want to highly recommend a paper by my colleague Charles Engel, and John Rogers of the Fed, that more formally investigates the conditions under which a 7% CA deficit is sustainable:
Jack Miller: I wish I could have such a upbeat view of the world. I have to admit that the assertion that the adjustment is underway when the trade deficit (both total and ex-oil) continues to expand as a proportion of GDP is a bit puzzling to me. Is there a model that drives these conclusions?
Posted by: menzie chinn at December 15, 2005 02:33 PM
GM is shedding 275,000 jobs in the US, Delphi is belly up, highest trade deficit ever...
Maybe if we add a war somewhere... Irak; you couldn't have a rosier picture.
And, I forget, those Boeing bellies are being manufactured in Japan...
...But, I think it could be a little better.
Let the dollar fall, the sooner the better...
Posted by: Joe Rotger at December 15, 2005 02:42 PM
"...By the way, this is why the ideal way to shrink the trade deficit is via fiscal policy, i.e., by shrinking the budget deficit. Taking that action would have an unambiguous effect on the trade deficit".
Certainly not unambiguous. Recall 1995-2000 with the public deficit falling and turning into a surplus, and the trade deficit/Current account deficit rising!
Posted by: JM at December 15, 2005 07:08 PM
JM: If the budget balance hadn't been shifting to surplus, the deficit might have been even larger. The trade deficit was largely attributable to the dot.com bubble which probably would've occurred regardless of the exact path of budget deficit.
In other words, not everything is held constant in the real world.
Posted by: menzie chinn at December 15, 2005 08:48 PM
found this interesting article
on the puzzle of the 'differential' as JH puts it between American foreign investment and foreign investment in the US.
I see that Setser takes some notice (or possibly just contempt) [or maybe he is mustering a reply]
Last thing: Setser points out that the cbs are not the major actors in the foreign investment if you go by the TIC source.
Posted by: calmo at December 16, 2005 09:43 AM
Calmo: Just downloaded the paper; had read the op-ed in the FT, which I admit I didn't understand. Brad Setser has a even more recent post touching on dark matter.
Yes, it seems that private capital inflows seems to account for more of total inflows than in quarters past. One question is how OPEC countries account for their acquisition of dollar denominated assets. Even if the central banks aren't acquiring these assets, government entities might.
Posted by: menzie chinn at December 17, 2005 09:26 AM