Thursday, June 23, 2011

The Great Rebalancing

From the WSJ:

Several factors are at play in the uneven global economy. One is a big rebalancing that many economists believe has been long coming. China and other developing economies have depended on exports to the U.S. to fuel their growth. Meantime, U.S. consumers feasted on cheap imports. In the process, China amassed a large trade surplus and the U.S. trade deficit soared. Global growth appears to be shifting, with the U.S. consuming less and exporting more, and the opposite happening in places like China. While healthy in the long-run because it reduces these imbalances, the change is proving to be highly disruptive, especially to the U.S. economy, which depends so heavily on domestic consumption.
Let's place this paragraph in perspective, as it says a great deal about what is happening internationally.

Above is a chart of the US' trade balance, which clearly indicates we are a net importer, and have been for some time. However, the recession greatly slowed our imports, and while the situation has worsened somewhat since then, it has still improved from the 2006-2008 position.

Above is a chart of Chinese imports. While it has rebounded from the drop we saw during the recession, it's rate of increase is clearly slowing. There are many reasons for this. The biggest is China no longer provides as strong a labor arbitrage as before, largely because their middle class is growing.

The above chart is perhaps the most important, as it shows a strong increase in US exports to China since the start of the latest expansion. There is still a vast difference which clearly favors China. However, the above chart shows that US manufacturing is helping to decrease the difference.

As NDD has already noted, households continue to de-leverage as well. This is one contributing factor in the slower pace of US consumption. Also adding pressure to US consumers are higher commodity prices and weak wage growth. While consumers are still spending, they are not spending as much as they did.

The US has a lot to do in order to catch-up with Chinese imports. But, we are clearly starting. In addition, US consumption is slowing, helping to lower demand for Chinese imports. But, the rebalancing process is very slow.