January 12, 2006
Trade figures for November
How good is the news, really?
Jan. 12 (Bloomberg) -- The U.S. trade deficit narrowed more than forecast in November on record exports, suggesting stronger growth overseas will bolster American manufacturing.
The gap narrowed to $64.2 billion during the month from a record $68.1 billion in October, the Commerce Department reported in Washington. Overseas sales of Boeing Co. aircraft, machinery and consumer goods rose. The deficit with China shrank for the first time in eight months...
A portion of this improvement was due to the decline in oil prices, rather than a quantity adjustment:
Cheaper crude oil helped reduce America's import bill, the Commerce Department report showed. The value of petroleum product imports, which include crude oil and refined products, fell to $24.6 billion from a record $25.4 billion.
The price of a barrel of crude oil averaged $58.34 in November, down from $62.27 in October. The U.S. imported 10 million more barrels of crude oil in November than in October.
Of course, since then oil futures prices have again risen to about $64 per barrel.
This figure shows the evolution of both the trade balance and the trade balance excluding oil imports, placing in context these new figures. In fact, the rebound in both balances is from very low levels.
Source: BEA, US International Trade Release for November 2005 (Jan. 12, 2006).
Data are seasonally adjusted, in millions of dollars.
The prospects for continued improvement do not look altogether strong, despite accelerating growth in Europe and Japan.
The good news on the trade balance may be temporary, some economists said. The gap for 2005 is still headed for an all- time high of more than $700 billion and may widen this year as U.S. consumers demand low-cost goods from countries such as China and Mexico.
Evidence that is consistent with this view is provided by the trends in goods trade, at least indicated by three month moving averages. These suggest that we're still on a downtrend. (red and black lines are 3 month moving averages corresponding to blue and green lines.)
Source: BEA, US International Trade Release for November 2005 (Jan. 12, 2006).
Data are seasonally adjusted, in millions of dollars. Moving average series calculated on logs of underlying series,
then exponentiated to generate levels; may differ from BEA reported moving average series.
Of course, ever expanding trade -- and hence current account -- deficits of this magnitude can't go on foreover, if the past is any guide. In this vein, a paper by myself and Jaewoo Lee indicates that over time the current account balance must fall to between 2.5% and 3% of GDP, based upon historical correlations between current account imbalances and the dollar's value. That means the economy is eventually headed toward a deficit of around $30 billion per month, rather than the $64.2 billion, suggesting we still have a lot of adjustment to do (our results suggest that a couple percentage points of adjustment will be associated with dollar depreciation, so expect a reversal of recent dollar trends).
Posted by Menzie Chinn at January 12, 2006 10:26 AMdigg this | reddit
An interesting new take on the trade deficit issue:
Posted by: Jim Glass at January 12, 2006 07:56 PM
That means the economy is eventually headed toward a deficit of around $30 billion per month, rather than the $64.2 billion, suggesting we still have a lot of adjustment to do (our results suggest that a couple percentage points of adjustment will be associated with dollar depreciation, so expect a reversal of recent dollar trends).
Menzie, not to disagree but how you do envision this happening without a general if not significant decline in U.S. standards of living for at least the bottom 50 percent of the U.S. population?
The majority of the manufacturing operations overseas will not be coming home. It just won't happen. There are too many cards in the game to keep those industries located abroad.
Posted by: Movie Guy at January 12, 2006 08:39 PM
Jim Glass: Two points on "Dark Matter". My colleague Don Nichols has posted his critique, which points out some problems attributing all the discrepancy to US intellectual property.
DeutscheBank writes (in Exchange Rate Perspectives, January 2006 issue:
There is no dark matter or mystery with regard to
financial income. The deficit on financial income has continued to widen as it is borrowing on financial markets that has financed the US current account and FDI deficits. Rates of return on financial investment in the US have been on average modestly (40 bps) higher than on financial investment abroad. These rates of return have moved closely together and been
closely correlated with interest rates.
While both the surplus on FDI income and the deficit on financial income flows have continued to widen, the deficit on financial income has recently caught up with the surplus on FDI income
and is set to overtake it.
Movie Guy: Our study indicates that a further 20% decline from end-2004 levels to get to a "sustainable" level. Since the dollar appreciated by about 5% against a broad basket of currencies over 2005 (in log terms), this implies that a 25% depreciation is required. This depreciation is associated with a reduction in income growth and expenditure switching between home and foreign tradable goods, and switching spending between tradables and nontradables.
As I mentioned in my post on the tradables share of output and the adjustment process, the smaller the tradables sector, the harder the adjustment. So I fully accept that it may take an even larger exchange rate adjustment to get back to a sustainable current account balance. As we pointed out in the paper, we are relying upon the persistence of historical relationships in order to make our inferences. But that is a failing of just about any quantitative-based prediction of current account/exchange rate movements.
But there does exist a combination of exchange rates and changes in consumption that will induce an increase in exportables (not just manufacturing, but also services) that will effect rebalancing to sustainable levels.
Posted by: menzie chinn at January 12, 2006 09:02 PM
I believe that there is a differential between the imported oil price and WTI, because the former includes a lot of heavy and sour oils.
I guess the differential changes from month to month, so I am not sure what $64 WTI is equivalent to, I guess probably something between $58 and $62, based on my recollection of WTI prices in October and November.
Posted by: Heiko Gerhauser at January 13, 2006 02:27 AM
On dark matter:
But it's quite a useful explanation. I've had the same kinds of thought when thinking about China or oil. Whyever would the Chinese government lend the US money at 5%, and invite investment in by US companies who get a 10% return?
The only explanation is that in return China is getting something valuable, and that must be some combination of expertise and intellectual property.
Posted by: Heiko Gerhauser at January 13, 2006 08:34 AM
First, a correction to the link to my colleague's critique of the dark matter argument.
Heiko Gerhauser: Yes, WTI is less expensive than Brent or Dubai Fateh, but the important point is that these oil prices covary, so the basic point remains that as WTI declines, so will the others, with a couple dollars of discount (depending upon market conditions).
On dark matter, I think most people agree that there is some miscounting going on in the accounting in the dark matter hypothesis. And what is not explainable on that count -- well I agree that people pay for things because they expect a return on it, but sometimes expectations include future market share, and other assets that don't pan out (remember Japanese investment in Pebble Beach and Rockefeller Center in the 1980's). In any case, the DeutscheBank piece makes clear that the FDI net positive balance is eroding, and the overall net income balance is also essentially zero (a point I made in this post on the 2005q3 current account figures).
Posted by: menzie chinn at January 13, 2006 09:43 AM
Dr. Chinn, to follow up on your colleague's example: If *all* of the excess return were to be accounted for as an export, rather than ROI, what would the CAD look like? In other words, even if Nichol's argument pokes a serious hole in the author's "market value" methodology, is it still possible that a looming crisis is overrated?
Posted by: Thomas Wood at January 13, 2006 10:03 AM
For those of you interested in the Hausmann-Sturzenegger "dark matter hypothesis," I want to bring your attention to Brad Setser's excellent and thoroughgoing analysis on this matter.
Thomas Woods: "Crisis" is a word with many definitions. My point is that a sensible macroeconomic policy framework would work to avoid the potentially large costs associated with disruptive adjustments, either at home or abroad, to these large current account imbalances.
Even if there is no large disruptive adjustment, the slow erosion of US economic and political power by way of growing indebtedness or debasement of the US dollar (continued unanticipated dollar depreciation is required to get the current account deficits not to manifest itself in a deterioration in the net international investment position) is not something that any responsible policymakers should view with equanimity.
Posted by: menzie chinn at January 13, 2006 11:37 AM
What I was getting at is that comparing the latest quotes for WTI with the monthly average import prices in November and October overstates the likely rise in import prices in December and January.
(that's a chart for the Feb contract, which I think will do)
From this chart it looks like the WTI averages for November and December are quite similar, and so far January is running at similar levels to the beginning of October.
Posted by: Heiko Gerhauser at January 13, 2006 12:41 PM
Heiko Gerhauser: Good point. Working off the Energy Information Administration's data, I find that average October, November, December 2005 and 6 January 2006 WTI and weighted all imports (fob) prices are, respectively:
Oct: $62.39 and $54.44
Nov: $58.57 and $51.11
Dec: $59.14 and $51.69
Jan 6: $63.39 and $55.12
My point is that November's oil import bill was down from October, due to lower oil prices (by about $3 1/3 per barrel). Beginning January prices are slightly above the average for October; this suggests upward pressure in the January oil import bill. (Data for prices at Spot Prices and for import prices at World Crude Oil Prices)
Posted by: menzie chinn at January 14, 2006 10:08 AM
There are significant difference between spot prices and what firms actually pay for oil.
the average refiner acquisiton price for imported oil was:
The spot oil price is closer to the marginal price as compared to the average price that you find in most government data.
Posted by: Anonymous at January 14, 2006 11:38 AM
Anonymous: I agree. The important point is the trend in the prices, and all have moved up at the beginning of 2006 toward October levels.
Posted by: menzie chinn at January 15, 2006 09:23 AM
This may figure into this discussion:
"Chinese oil demand gets even harder to pin down"
By Shai Oster
17 January 2006, Front Page - The Wall Street Journal Asia
BEIJING -- China has confounded world energy markets by reporting that its apparent oil demand was flat last year instead of modestly higher, renewing doubts about Chinese oil data and raising questions about how the fast-growing economic giant will affect global oil prices this year and beyond.
China has emerged as the world's second-largest consumer of oil after the U.S. Its more-than-15% surge in demand in 2004 helped drive the biggest gain in world oil prices in a generation. With China's economy now growing at nearly 10% a year, analysts are split over how oil demand could have held flat in 2005, and some are expressing skepticism about the accuracy of the new Chinese numbers. Oil traders will be looking closely for clues to what lay behind last year's slump and what to expect this year.
Friday, the Chinese government reported that imports of crude oil rose just 1.2%, while imports of oil products such as diesel fell 34%. Overall, apparent demand -- domestic output plus imports, minus exports, factoring in changes in oil-inventory levels -- fell 0.3%, to about 6.4 million barrels a day. An official at China's top economic planning body, the National Development and Reform Commission, yesterday declined to comment on the data, but did say China's dependence on oil imports had declined.
"December [demand] must have fallen off a cliff," said Deutsche Bank energy analyst David Hurd. His own calculations put growth in China's apparent oil demand for 2005 at above 3% through November, roughly in line with those of the Paris-based International Energy Agency, the energy watchdog for the world's largest economies.
Another factor that may be capping demand, paradoxically, is China's reluctance to fully raise domestic gasoline prices in line with international rates. The government-set prices have jumped enough in the past two years to entice Chinese consumers to drive less and to buy cars with better fuel efficiency, said Han Xiaoping of Beijing-based consultancy Falcon Power Ltd. But they remain low enough that Chinese refiners lose money on each barrel of oil they turned into gasoline. Thus they cut purchases of oil; last summer there were gasoline shortages in some regions.
Posted by: nate at January 16, 2006 10:51 PM