After shrinking in the recession, it's back up, with imports outpacing exports—and it "doesn't seem to be a problem that's self-correcting"
The U.S. trade deficit shrank like a puddle in the hot sun in 2008 and 2009 as appetite for imports melted in the recession and Asian export markets grew. With the U.S. economy now improving, the gap is widening again, dashing hopes that the U.S. is anywhere close to rebalancing trade with the rest of the world.
On Apr.30 the Commerce Dept. announced that the economy grew at an estimated annual rate of 3.2percent in the first three months of the year, propelled by stronger consumer spending and business investment. The bad news is that a lot of that consumption and investment went for imports. While exports grew at a 5.8percent rate, imports grew at an annual rate of 8.9percent. Overall, the trade deficit nicked 0.6 percentage points from the growth rate.
The broadest measure of the trade deficit peaked in 2006 at just over $800billion, or 6 percent of gross domestic product. (These numbers describe the current account, which includes trade in goods and services as well as cross-border investment income.) By 2009 it was a little more than $400billion, just under 3percent of GDP. But by the second half of 2009, the gap had already come off its bottom—rising 18percent from the second to the fourth quarter. "We would expect [the trade deficit] to grow a little bit faster than the overall economy," says Ethan Harris, chief economist at Bank of America Merrill Lynch (BAC).
The quick resurgence shows that the recession didn't reduce U.S. overdependence on imports; by permanently closing many factories, it probably helped hollow out the U.S. economy, making it harder to balance trade. As General Electric (GE) Chief Executive Officer Jeffrey Immelt said in a recent speech, China is likely to surpass the U.S. in manufacturing output in the next few years. "In Reagan's time, America was the world's biggest exporter by far," said Immelt. "Today, we're fourth."
The problem with a big trade deficit is that it adds to the debt of the U.S., already the world's biggest borrower. It also saps growth, because U.S. consumer demand is being met by foreign rather than domestic production. "Americans won't have jobs," says Peter Morici, a University of Maryland economist.
Industrial America's plight can be encapsulated in a few incredible numbers. According to the Bureau of Labor Statistics, U.S. employment in manufacturing over the past six months has been the lowest since March 1941, before the U.S. entered World WarII. The March total was a little under 11.6million workers, down 19percent in just the past five years. Productivity advances account for some job reductions, but that's not the whole story: Manufacturing's share of GDP shrank from 25percent in the 1960s to 15percent in 2000 and just 11percent in 2008, according to data from the Commerce Dept.'s Bureau of Economic Analysis.
Many of the most powerful U.S. manufacturers produce their goods for foreign customers in overseas locales, which does nothing to shrink the trade deficit. General Motors is going gangbusters in China, where it announced that it's on track to reach its target of 2million annual vehicle sales four years ahead of schedule. Most of those GM cars, however, are made in the mainland. Likewise, Eaton (ETN), the Cleveland-based equipment maker, gets 55percent of its sales outside the U.S. Spokeswoman Kelly Jasko says, "Our philosophy is to manufacture in the zone of currency."
Exports' Rise Surpassed by Imports'
True, manufacturing is rebounding from its recession trough, and exports are growing. They rose 14percent in the 12 months through February. David Huether, chief economist at the National Association of Manufacturers, says "the idea that we don't have the capacity to sell product overseas is off base" and predicts that trade is "going to be one of the durable bright spots for the next [few] years." Exports of scrap iron and steel have more than doubled from 2005 to 2009, with more than one-third going to China. On Apr.26, Caterpillar (CAT) announced a swing to a first-quarter profit from a year-earlier loss thanks to improved conditions, "particularly in the developing economies."
Still, brisk growth in China, India, and other Asian nations isn't triggering purchases of U.S. goods as strongly as it might. That's because much of the growth in Asian trade is within the region, says Frederic Neumann, co-head of Asian economics research for HSBC (HBC) in Hong Kong. Europe, a more receptive market for the U.S., is weak.
Rising imports are the other culprit. Imports for the 12 months through February grew faster than exports, increasing 21percent. In the first two months of 2010, the U.S. bought nearly $15billion worth of advanced technology products such as computers from China, but sold China only $3billion in high-tech goods, according to Commerce data.
Higher oil prices exacerbate the U.S. trade deficit. Yet even in volume, U.S. imports of all goods will grow nearly as much as exports this year, estimates Michael Englund, chief economist of Action Economics in Boulder, Colo. He concludes: "This [trade deficit] doesn't seem to be a problem that's entirely self-correcting."
The bottom line A large economy like the U.S. needs a manufacturing base to be an export power. That source of strength seems to be fading.