The Trade Deficit fell in September to $43.11 billion from $44.92 billion (revised down from $45.61 billion) in August. That is a 4.02% decline for the month (and a 5.48% decline from the pre-revision level). That was much better than the expected deficit of $45.9 billion.
That, combined with the revision to the August numbers, would indicate that when we get the next look at the third quarter GDP numbers, growth will be revised up from the 2.5% growth rate reported in the first look.
On a year-over-year basis, the total trade deficit was down by 2.04% from $44.01. The trade balance has two major parts: trade in goods and trade in services. America’s problem is always on the goods side; we actually routinely have a small surplus in services. Relative to August, the goods deficit fell to $58.90 billion from $60.93 billion (revised down from $61.42 billion).
Relative to a year ago, the goods deficit was up 4.28% from $56.48 billion. The Service surplus was down slightly from August to $15.79 billion from $16.01 billion or 1.37% (revised up from $15.81 billion). Relative to a year ago it is up 26.62% from $12.47 billion.
Exports Up Again
Exports of goods rose by $2.62 billion, or 2.07%, for the month to $129.29 billion. Relative to a year ago, goods exports are up 18.87%. In other words, we are well above the pace to meet President Obama’s goal of doubling exports of goods over the next five years. On a year-to-date basis, goods exports are up 15.85%, above the pace needed to double over five years.
Service exports were down slightly for the month to $51.09 billion, but only after the August numbers were revised up. They are up 8.93% year over year, which is well short of the pace needed to double over five years (just under 15%). Total exports rose 1.40% for the month to $180.36 billion and are up 15.88% year over year, just above the pace needed to double over five years.
Doubling exports over five years is all well and good, but not if we also double our imports over the same time frame. After all, it is net exports which are important to GDP growth, and to employment. For the month, total imports rose by just 0.31%.
Imports Also Up
Relative to a year ago, goods imports were up by $23.80 billion, or by 11.92%. At that pace, they are below the pace needed to double over five years. However, since they at starting from a higher base, the dollar increase, is almost as big as the $24.71 billion increase in total exports. Service imports were up by $11 million on the month or 0.31%. Goods imports rose by $57 million (0.30%) for the month to $188.17 billion and are up 13.88% year over year.
In September we bought from abroad $1.455 worth of goods for every dollar of goods we sold, down from $1.481 in August, and down from $1.519 a year ago. Including services, we imported $1.239, down from $1.252 in August, and down from $1.283 a year ago.
Trade in goods simply swamps trade in services, even though services are a much larger part of the overall economy. So far in 2011, the total trade deficit is up 9.79% from the first nine months of 2010. The goods deficit is up 13.80%, offset by a 28.30% increase in the service surplus. Year to date, our deficit with the rest of the world is $418.62 billion, up from $381.29 billion in the first nine months of 2010.
All things being equal, it is better to see trade going up than down. Increasing trade tends to increase the size of the overall pie, but also tends to rearrange the size of the slices within a country. We want to see both exports and imports growing, but given the massive deficit we are running, we need to have exports rise dramatically faster than imports, or actually see imports fall.
From a purely nationalistic point of view, rising exports or falling imports are roughly equivalent in terms of economic growth. Falling imports, though, implies economic pain in some other countries. Thus, all things being equal, it would be better if most of the improvement in the trade deficit came from rising exports rather than falling imports.
A big part of what made the Great Recession into a global downturn was an absolute collapse in global trade. This can clearly bee seen in the long-term graph of our imports and exports below (from http://www.calculatedriskblog.com/). Falling imports and exports are clearly associated with recessions. In the Great Recession our imports collapsed faster than our exports, and so we had a very big improvement in the trade deficit.
Falling imports were just about the only thing keeping the economy on life support during those dark days. That, however, was just a transmission mechanism that spread the recession to the rest of the world. Thus, growing world trade is a good thing, but not if it comes at the expense of an ever-rising U.S. trade deficit. In other words, all other things are not equal.
In the last two quarters, a reduction in the trade deficit added slightly to GDP growth. Absent the aid from trade growth would have been 2.28% in the third quarter, not 2.50%, and in the second quarter it would have been 1.06% not 1.30%. A rise in the trade deficit was a drag in the first quarter, and without that drag growth would have been 0.74% instead of just 0.40%. However, any trade deficit at all is a subtraction from the overall level of GDP.
Trade Deficit Is More Important
The trade deficit is a far more serious economic problem — particularly in the short to medium term — than is the budget deficit. The trade deficit is directly responsible for the increase in the country’s indebtedness to the rest of the world, not the budget deficit. That is not just a matter of opinion: that is an accounting identity.
While most of the foreign debt is in T-notes, try think of it as if we were selling off companies instead of T-notes. This month’s trade deficit is the equivalent of the country selling off Halliburton (HAL), while last month’s deficit was the equivalent of selling off U.S. Bancorp (USB).
How long would it take before every major company in the U.S. was in foreign hands if this keeps up? Put another way, the 2010 trade deficit has totaled $497.82 billion, which is 64% what all the firms in the S&P 500 earned, worldwide, in 2010.
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