The US trade deficit narrowed to $-36.0bn in January from a revised $-39.9bn in December and compared with consensus expectations for $-38bn .
Good news right?
Well, not necessarily. The devil, as they say, lies in the detail, and the key bit of data to be considered is oil imports. These fell sharply both in volume and in price in the month.
As Bank of New York Mellon put it(our emphasis):
The impact of the continued fall in average crude oil prices to $39.81/bbl in January from $49.93/bbl in December and a high of $124.66/bbl in July, was exacerbated by a decline in the volume imported to 300.1M bbl from 319.8M bbl. This helped to reduce the bilateral deficit with OPEC to -4.0B USD in January from -4.7B USD in December.
With that in mind, it is also worth noting the following (ex-petroleum being the key word):
It is interesting to note that the structural -20B USD bilateral US trade deficit with China has failed to improved recently at the same time that the PBOC has stopped its campaign of gradual CNY appreciation. The -20.B USD bilateral trade deficit with China is roughly equal to the total US trade deficit ex-petroleum.
With crude oil down -70% off its highs last summer, the ex-petroleum deficit is what both policy makers and market players should be focused on. To this point, the structural US trade deficit appears to be almost exclusively with one country - China. Given China’s reluctance to liberalize its capital account, make its currency convertible and allow more flexible, market-determined exchange rates, expect tensions between China and the US to begin heating up again this year. China is simply too large an economy and too important in international trade to continue with a third world exchange rate system.
What it means, as CFR blogger Brad Setser also points out, is that unless the price of oil tumbles more, the monthly US petrol deficit won’t fall any further. But the prospect of oil prices falling soon is not seen as very likely, especially given recent Opec cuts. With that in mind, he warns of another potentially worrying development too — specifically the pace of the decline in non-petrol goods imports:
More importantly, the pace of decline in US non-petrol goods exports now exceeds the pace of decline in non-petrol goods imports. Non-petrol goods exports were down 21.5% y/y in January; non-petrol goods imports were down 18% (Exhibit 9). Relative to August, exports are down more than 28% and imports are down more than 23%.
The data on the United States ‘real” trade balance consequently paints a far more discouraging picture. The real balance removes the impact of price changes from the data. The real non-petrol goods deficit was a bit wider in January than in December ($32.8b chain weighted dollars v $31.6b). The deceleration in real export growth has been quite sharp. Real exports were up 10% y/y as recently as July 2008. They were down 9.7% y/y in December 2008. And they were down 19.2% in January.
Real goods imports flat in June 2008 (and close to flat in July); they are now down over 17.6% y/y in real terms. Not only is the y/y fall in exports now larger than the year over year fall in imports, but the pace of deterioration in exports is now more rapid.*
Which means, no more narrowing trade deficit come February. What’s more, with the majority of the remaining structural deficit now lying with just China alone, the balancing act that is the Chinese-US trade relationship could see some very interesting new developments. For one — in light of Beijing’s growing concern over its US investments – Setser speculates whether we could see China buying more US imports instead of bonds. As he puts it:
China’s Premier Wen has expressed concern – understandable ones, given China’s huge holdings — about the safety of China’s investment in the US. I would note that buying more foreign goods (i.e. importing more) is an obvious alternative to buying more bonds. And right now the global economy — and the US economy — could use a bit more demand for goods.
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An update: Here’s a good chart reflecting the varying pace of import/export declines as posted on Calculated Risk. (Click to enlarge)
Related links:
China’s Premier Wen ‘Worried’ on Safety of Treasuries - Bloomberg
U.S. trade gap narrows for record sixth month – Reuters