June 23, 2009
Update on US Exports and Imports: The Collapse Continues
Here's an update of US imports and export behavior. The trade collapse remarked upon a couple of months ago is still in play.
Figure 1: Log goods import ex.-oil from NIPA (blue), and log goods exports ex.-agricultural goods (red), all in Ch.2000$, SAAR. NBER recession dates shaded gray. Source: BEA, GDP 2009Q1 preliminary release of 28 May 2009, NBER, and author's calculations.
The annualized drop in non-oil goods imports was 60.5% in 2009Q1 (log terms), while that of non-agricultural goods exports was 51.5% (both in log terms).
The misprediction by the standard (i.e., old fashioned) macroeconometric models (see ) documented in an earlier post persists. The model is given by:
Imp = α 0 + α 1 y + α 2 r
Where Imp is real imports, y is real income, and r is the real value of the dollar.
I estimate an error correction version of this model over the 1973q1-2009q1 period, wherein there is a long run relation between the levels of imports, income and the real dollar.
Δ imp t = β 0 + φ imp t-1 + β 1 y t-1 + β 2 r t-1 + γ 1 Δ imp t-1 + γ 2 Δ y t-1 + γ 3 Δ r t-1 + u t
In this specification, the long run elasticities are given by the ratio β i/ φ . When this model is estimated over the 1974q1-2008q4 period, one obtains sensible estimates (in that higher income or a stronger dollar induces greater imports in the long run).
The specification fits fairly well, with an adjusted R-squared of 0.34, and a Breusch-Godfrey Serial Correlation LM Test (2 lags) failing to reject the null at conventional levels. The long term coefficients are statistically significant, while the reversion coefficient (φ) is also significant and negative.
One way of evaluating whether the 2008q4-09q1 observations are anomalous, in a statistically significant sense, is to examine the recursive residuals. A recursive residual is the time t prediction error based upon the regression estimated up to time period t-1, but using time t values of the X variables. Figure 2 depicts the 95% standard error band; an observation outside that band suggestive structural instability in the regression equation.
Figure 2: Recursive residuals from standard model of imports error correction specification, 1974q1-2009q1. +/- two standard error band (red dashes).
What about exports? I estimate an analogous expression for non-agricultural goods exports.
Δ exp t = θ 0 + ρ exp t-1 + θ 1 y* t-1 + θ 2 r t-1 + σ 1 Δ exp t-1 + σ 2 Δ y* t-1 + σ 3 Δ r t-1 + v t
Note that the rest-of-world GDP variable (y*) is the export weighted real GDP calculated by the Federal Reserve Board, for 1970q2-07q4; the 2008q1-09q1 data I estimated using a regression of first differenced GDP on a current and four lags of first differenced industrial country industrial production.
(Data sources: BEA 2009q1 preliminary release for imports, exports, GDP; Federal Reserve Board for broad index of real dollar value; personal communication/Fed for rest-of-world export weighted GDP; and IMF International Financial Statistics for industrial country industrial production (nsa).)
This specification also fits fairly well, with an adjusted R-squared of 0.34, and the serial correlation test again failing to reject. The long run coefficients are significant, as is the reversion coefficient (ρ).
Recursive residuals indicate a similar misprediction for 2008q4-09q1.
Figure 3: Recursive residuals from standard model of exports error correction specification, 1974q1-2009q1. +/- two standard error band (red dashes).
Posted by Menzie Chinn at June 23, 2009 05:00 PMdigg this | reddit
I really donít need an ďanalogous expressionĒ formula to prove to me that we have been paying for imports with the issuance of additional dollars and not from income from the selling of goods, services and/or assets.
Our foreign debt is dollar dominated, very little of our debt is backed by assets, and even if it is, the assets are way overvalued. The dollar has become a useless currency that is used as legal tender for commercial transactions because the commercial world has no other option.
The question is how are they going to get out from under the dollarís dominance without losing their wealth? And they will have to; otherwise our government will continue to use the central banks dollar stockpile to fund domestic programs.
I certainly did not support our unjust war with Iraq but I do support health care reform, educational reform, and other programs that help people help themselves. So I donít see the dollars dominance as being an ethical issue, but rather a problem that has gotten out of control and must be resolved so a better currency system can be developed.
Does anyone have any suggestions?
Posted by: Darrell at June 23, 2009 11:23 PM
Liked the analysis Menzies. If you look at the trade data over longer periods you have the same conclusion. The last time we had drops in trade this big was the great depression - though obviously that drop was much worse.
One small point about the residuals. To me it looks like the residuals for both exports and imports tend to be more positive in the earlier years and tend to be more negative in the later years (say after 2000). i.e. the past decade may have seen some underlying structural change causing less world trade than expected. Obviously what has happened in this recession dwarfs this impact though. I guess you could crudely check for some change in structure over time by having an independent varible representing time.
Obviously recessions also have an impact beyound the independent variable but cleary this one is way beyoudn the norm.
Posted by: Steve van Emmerik at June 24, 2009 02:02 AM
I really appreciate your updates on imports and exports. It is a great reflection of the world economy and many do not understand just how important international trade is to economic prosperity. International trade problems coming to a head in the Hawley-Smoot tariff act were actually the cause of the crash in 1929 and the start of the Great Depression. And actually Roosevelt destroying the international trade meetings in favor of Irving Fisher's pump priming foolishness was one of the worst errors of the period. But then the government was so bad during this period you could point to almost any of their decisions as contributing to the mess.
Posted by: DickF at June 24, 2009 05:14 AM
A couple of technical questions.
When you say the real value of the dollar are you talking about inflation adjusted dollars? How was this determined?
Can you help me understand this parenthetical expression: (in that higher income or a stronger dollar induces greater imports in the long run)? Does this mean either higher income or a stronger dollar or both? And when you say greater, greater than what? An average? The trend? Other?
Posted by: DickF at June 24, 2009 06:10 AM
DickF: Growth rate of bilateral real (CPI deflated) exchange rates weighted by trade weights, then cumulated to obtain a level; this is standard -- see this paper for the formula and references.
The expression "long run" means in this case the "statistical" long run, as used by Engle and Granger in their analysis of integrated and cointegrated time series variables. Think "partial derivatives".
Posted by: Menzie Chinn at June 24, 2009 07:19 AM
This week congress is planning to vote on Cap and Trade. The behinds the scene is going crazy as the Democrats are working the same kind of deals that congress worked to pass Smoot-Hawley. The bill is slowly growing to include exemptions from powerful opposition interests to buy they silence. It is doubtful that there will be over 1,000 economists who will sign a letter to President Obama asking him to not sign the bill because the economics profession is filled with people who cannot see how destructive this will be to our economy, but the bill itself will drive down the economy lower than anything witnessed during the Great Depression.
As Menzie points out the US is already seeing a huge decline in trade both exports and imports. Once Cap and Trade is passed the increase in production costs will seriously impact our exports and lead to worse economic decline. Imports will also continue to crash.
Even the administration has finally admitted that unemployment will enter double digits before the end of the year, but they simply do not realize how bad it will become. With the passage of Cap and Trade there is a good chance that unemployment will be worse than 1933 by the end of 2010.
The vote is scheduled for Friday in the House.
As an aside you have not heard anything about the Card Check bill that will allow the Unions to expand exponentially through direct intimidation and force to make workers vote for the unions. It is reported that Card Check is scheduled for a vote in the Senate on Friday.
It is no accident that the administration is doing its ABC infomercial for health care this week. It is a cover so that the media will have an alternative news story to Cap and Trade and Card Check.
I am more depressed than I have ever been concerning our nation.
Posted by: DickF at June 24, 2009 08:10 AM
This experience certainly trashes the idea that Smoot-Hartley was at all important in the Great Depression. So far, this is tracking along quite similarly.
Posted by: Lord at June 24, 2009 03:59 PM
You post a lot of really good charts on your blog. I'm learning R (which it appears you use), and I'd like to be able to recreate some of what I see on here. Would it be possible to post your code along with the results?
Posted by: Kevin at June 25, 2009 12:03 AM
Posted by: DickF at June 25, 2009 08:07 AM
Of course, dressed up protectionism such as this could easily fuel retaliatory tariffs, a la Smoot Hawley in 1930. Ironically, the statute that would be amended to include this amendment, were it to become law, would be the Tariff Act of 1930, better known as the Smoot Hawley Tariff Act!
A friend from Bretton Woods Research, LLC sent me the quote above from a report they released today. He read my post and wanted me to know that Smoot-Hawley will actually be part of the Cap-and-trade bill to be voted on Friday.
While I do believe that Bush was Hoover of 1929 it appears that Obama will be Hoover of 1930-32 as well as Roosevelt. Consider that in 1930 most people in the US actually thought the economic decline was over. Consider the condition of the country in 1931 compared to 1929, just 2 short years. Imagine what our country will look like in just 2 years as we go down the same road. I don't want to be right but every day there is more evidence.
I know there are a lot of people who agree with Jonathan Alter that one of Roosevelt's greatest assets was that he "threw a lot of things against the wall to see what stuck" but would you put your investments in the hands of a financial planner who had this as his business plan? And this is the attitude that is praised? When people are starving and standing in bread lines such ideas are just no longer cute.
Posted by: DickF at June 25, 2009 08:31 PM
Kevin: I'm afraid I'm more old-fashioned than that; the graphs are produced by EViews.
Posted by: Menzie Chinn at June 26, 2009 08:29 AM
Regarding the Cap-n-Trade comments...
While I'm too old to care what happens to America, I sure don't see how Cap-n-Trade is any worse than any other scam the insiders have run on the country for the last 200+ years. So, let's say, Cap-n-Trade sucks 300 billion from the economy into the hands of the already wealthy insider-scum. They'd get this money ANYWAY some OTHER way. The insider-scum OWN the politicians and (obviously) the Treasury Department; the military's been a 300+ billion drain for decades now. The insider-scum will get-ya regardless.
All oligarchies are like mafia. If the peasant citizens actually cared they'd have voted them out of office 20 years ago. But, peasants BEING peasants, they are more worried about "distractions" than reality (tiny brains can only handle so much information) OR - the smarter ones - know that nothing can be done about a mafia other than paying the "protection money".
As long as the majority of peasants are happy (food & TV - bread & circus) nothing can be changed because the system is working perfectly. Stop worrying about the insider-scams "ruining `merican" and start getting IN ON some of them.
Posted by: John at July 9, 2009 03:26 PM