A Rising Trade Gap Sinks Growth
By Michael Englund and Rick MacDonald
Records have been dropping all around lately. In pro football, Dan Marino's single-season mark for touchdown passes has been eclipsed by Peyton Manning. And in economic data, another touchstone has fallen: The November trade deficit surged to a record $60.3 billion, well beyond economists' median forecast of $53.3 billion and up from October's trade-gap figure of $56 billion. But unlike the Colts QB's feat, this particular milestone is no feel-good story, especially for financial markets.
Where did the big swing come from in this record-breaker? The November deficit's sharp widening reflected both broad-based weakness in exports and concentrated gains in imports of food and industrial supplies -- with stronger petroleum-import data on both price and volume -- alongside consumer-goods imports' sustained buoyancy.
A SEASONAL STORY?
Imports of capital goods, autos, and even industrial supplies of nonpetroleum items, actually fell on the month. Imports overall increased 1.3% in November, to $155.8 billion, following a 4.2% surge in the prior month to leave a solid two-month period of import growth.
Exports fell 2.3% on the month, to $95.6 billion, after October's puny 0.3% rise, led by huge declines in capital goods, autos, and industrial supplies. However, declines were broadly evident in all categories. The combined October and November export data revealed weakness that offset some of the sustained strength in exports over the prior four quarters.
The concentration of trade weakness in November may prove a seasonal story, as imports failed to post the usual drop-back in November from the surge usually seen in October, possibly due to port bottlenecks on the West Coast. Imports still would have been strong in the fourth quarter had these bottlenecks not occurred, but the surge would then have been concentrated in October, and the ensuing drop-back might have made the rise seem more temporary.
CHINA TRADE IMBALANCE.
With the November report, the U.S. trade data for 2004 reveal a fairly even geographic dispersion of strength. U.S. merchandise shipped overseas will rise by 13% in 2004, given data through November, while exports to the major trading partners of Canada, Mexico, the Western European region, and the Pacific Basin should all post growth in the narrow 10% to 14% range. Exports to South and Central America should gain 18%, however, while those to OPEC should reach a brisk 27% pace.
Growth in U.S. exports to China in 2003 and 2004 was 29% and 22%, respectively -- the same as the import growth rates from China of 22% in 2003 and 29% in 2004, though in reverse order (see BW Online, 1/13/05, "2005's Global Trade Hot Spots"). The big deterioration in the bilateral deficit to a likely $162 billion in 2004 is due entirely to the higher base of growth for imports than exports.
In total, the heftier November deficit suggests that the weakening in American trade data will prove to be much worse in 2004 than was assumed earlier in the year. And this puts the projected magnitude of the U.S. trade deficit in 2005 at risk. Yet, we believe that current levels of foreign intervention in foreign-exchange markets are unsustainable. So the dollar is likely to fall this year by sufficient magnitude to allow the huge U.S. current account deficit, and associated capital-account surplus, to reverse course.
The data have knocked down Action Economics' fourth-quarter real gross domestic product estimate to 3.8%. We continue to project 4.5% GDP growth in the first two quarters of 2005, with upside risk to trade, given a potential rebound in exports following the dismal November figures. Much will hinge on December's trade numbers.
Englund is chief economist, and MacDonald global director of investment research and analysis, for Action Economics