Thursday, March 15, 2007

Trade Deficit Improves

This report came out a few days ago. But I've been a bit preoccupied with the markets so I'm getting to it now.

From the BEA

A drop in oil prices and strong U.S. exports shrank the fourth-quarter deficit to $195.8 billion -- or about 5.8% of gross domestic product -- its smallest in more than a year. That compared with a third-quarter deficit of $229.4 billion.

So we have some good news and bad news. The bad news is the trade deficit set another record last year, but the good news is it may be decreasing a bit.

OK - let's look at some specifics.

The goods and services press release stated:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total January exports of $126.7 billion and imports of $185.8 billion resulted in a goods and services deficit of $59.1 billion, compared with $61.5 billion in December, revised. January exports were $1.4 billion more than December exports of $125.3 billion. January imports were $1.0 billion less than December imports of $186.7 billion.

Total exports were $114,405 billion in January 2006 and $126,672 in January 2007. Over the same period, total imports were $180,875 and $186,745. Another way to look at this is total exports are about 63% of imports in January 2006 and 68% of total imports in January 2007. That means that exports still have a long way to go before they are at parity with imports. In other words, the decrease is good news, but let's not get too excited.

Here is a report from the San Francisco Federal Reserve from late last summer. The report studied the effects of oil imports on the trade deficit. The reports conclusion was very important:

Oil prices have almost quadrupled since the beginning of 2002. For an oil-importing country like the U.S., this has substantially increased the cost of petroleum imports. International trade data suggest that this increase has exacerbated the deterioration of the U.S. trade deficit, especially since the second half of 2004. One factor can explain this evolution: The real volume of U.S. petroleum imports has remained essentially constant. One explanation for why the demand for petroleum imports has not declined in response to higher prices comes from a model in which firms are fairly limited in their ability to adjust their use of energy sources, such as oil, in the short term.

I think this report was incredibly important because it showed why oil imports are such a big deal from a trade perspective. Without oil imports, the trade deficit would be less by a considerable amount. This is another reason oil prices are so incredibly important to monitor.

So, what do we know now?

1.) The trade deficit is decreasing, although at a slow rate.

2.) Oil prices are a really big factor of the trade deficit.