May 12, 2005
PARSING THE TRADE REPORT
The U.S. Dollar Index has been marching higher in the wake of yesterday's better-than-expected trade-deficit news. This index of the greenback in fact reached its highest mark since last November. Has the turnaround in the trade deficit that so many have hoped for finally arrived? If so, should investors celebrate or reserve judgment about the implications?
Before we go off the deep end on speculating about the morrow, we should stop and consider that it's a sign of the times that the "good news" comes in a package that just a few short years would be considered by some to be apocalyptic. Indeed, for the January-through-March period, 2005's red ink on the U.S. trade front retains its first-place status as the deepest on record. Running at -$174 billion for the first three months of this year, that deficit is materially larger than $138.8 billion from the year-earlier three-month period. In fact, the trade deficit for this year's first quarter is larger than the total red ink for all of 1997, although such comparisons look far less dramatic on a percentage-of-GDP basis.
But for the moment, optimism reigns supreme, and that optimism seems likely to carry the dollar higher for the foreseeable future. In the meantime, it's unclear if March's trade report constitutes such a true turning point, although such a trend would represent no small gift to the American economy. Slow but steady progress on reducing the red ink of trade is the preferable method for adjusting international flows. Indeed, forex traders seem approving of the prospect of closing the trade deficit in $5 billion increments.
Nonetheless, there is just one trade report of the supposed new era to review, impressive though it is. March's trade deficit was $55 billion, the Commerce Department reported. That was the smallest trade gap in six months and more than slightly below the -$60 billion-plus that the market was expecting.
Among the immediate implications: first-quarter GDP revision, due for release on May 26, will be elevated somewhat by the improving trade picture. (Larger trade deficits, in the accounting system of compiling GDP, subtract from economic growth; lesser deficits, relatively speaking, add to growth.) Michael Englund of Action Economics expects a revision of first-quarter GDP to 3.8% from the initially reported 3.1%, he writes in BusinessWeek.
Materially raising GDP in the first quarter may convince the bond market that a 4.2% yield on the 10-year Treasury Note is in need of revision too. Or maybe not. The 10-year's yield has barely moved since yesterday's trade news hit the Street. Then again, one could reasonably ask if the deepening trade deficit that has long been a part of the American economic scene is truly reversing. The bond market seems to be asking no less.
Only time will tell, of course, but that doesn't stop any one for poring over the data for clues. With editorial pick and shovel in hand, we did just that, turning over numerical rocks for signs of what may or may not come. Although we found no drama that's otherwise unreported, there were a few tidbits on which we'll be chewing until the April trade report sees the light of day on June 10.
Among the intriguing facts embedded in the trade numbers, based on seasonally adjusted data:
· Although March's 1.5% rise in exports was above the 0.8% average logged since March 2004, the rate of increase wasn't exceptional based on recent history. In December 2004, for instance, exports advanced by 3.2%.
· The rise of U.S. goods exports (up 1.6% in March) was driven by agricultural products. In seasonally adjusted dollar terms, soybeans exports were by far the leading source of higher exports, followed by corn, animal feeds, rice, nuts and dairy products. Is any future renaissance in paring the U.S. trade deficit really going to be a function of shipping more walnuts to China?
· Although so-called services exports rose in March by 1.5%, the dollar value of those exports traditionally pales next to those for goods. In March, for instance, services exports totaled $30.1 billion vs. $72.1 billion for goods. That said, on a percentage basis the rise in services exports was concentrated in "Other Transportation," which jumped 4.1%, followed by "passenger fares" with 3.9%.
· The lion's share of the fall in imports in March was in goods, led by a falloff in consumer goods. The immediate questions that the trend poses: Does Joe Sixpack's sudden caution on buying reflect a broader trend for the future? If so, what does Joe's behavior imply for 2Q GDP?
Posted by jp at May 12, 2005 11:24 AM
There are some nuts you should be shipping out of your country.
Posted by: Big Al at May 14, 2005 10:20 AM
The reduction in the trade deficit does not reflect any structural changes in the economic situation. Unless something significant (i.e. a falling US GDP or a significant dollar decline ) occurs, trade deficits will grow.
The world economy is out of balance and a significant adjustment will be happening soon.
Posted by: DAVID at May 12, 2005 1:59 PM