Improvement in U.S. Trade Gap Looks Over Already


About the only bright spot in a U.S. recession is a
shrinking trade deficit. But despite the severe drop in
domestic demand, this downturn has seen only a short-
lived improvement in trade.

The reasons: China and the downsizing of U.S.
manufacturing. As a result, the trade sector is unlikely to
offer much lift to the economy.

There has been some progress. The U.S. gap
narrowed from almost $65 billion in July 2008 to $26.38
billion in May 2009. But improvement is usually larger.
During the mild 1990-91 recession, for instance, the trade
balance briefly shifted into surplus.

Since the summer, the deficit has widened. As reported
Friday, the September trade shortfall rose to $36.47
billion, partly because of rising oil imports but also because
imports overall rose much faster than exports did. The
higher-than-expected trade gap suggests real gross
domestic product grew closer to an annual rate of 3.0%
last quarter, instead of the 3.5% first reported.

Further deterioration could be on the way. On Friday, the
Chinese Commerce Minister said he hoped China’s exports
would grow in 2010. That would mean more shipments to
the U.S., one of China’s biggest markets. China hasn’t
allowed its currency to strengthen much against the ever-
weakening dollar that has made many imports more
expensive. As a result, Chinese imports have dropped
15.6% in the year ended in September, while all U.S.
merchandise imports were down 22.1%. And the U.S.-
China trade gap hasn’t narrowed nearly as much as the
total U.S. trade deficit has.

An increase in imports wouldn’t be worrisome–indeed, it
would be a sign that domestic demand is rebounding–if
the U.S. could expect exports to also pick up. The
problem is that less manufacturing is done in the U.S. So,
while exports may rise as a result of the weaker dollar and
better global growth, the gain won’t be enough to offset
the increase in imports and, consequently, the trade gap
will widen.

In a research note, Brian Fabbri, economist at BNP
Paribas, said manufacturing is only 13% of U.S. GDP and
all goods production is only 27.8%. Services are where the
U.S. has a comparative advantage, but goods exports are
the area that picks up first as emerging nations invest in
capital projects.

That’s not to say that U.S. companies won’t profit from
the global recovery. But goods carrying U.S. brand
nameplates are increasingly made overseas, or the input
materials are manufactured abroad. That’s good for
multinationals, but not necessarily positive for domestic
production or workers.

It is worth noting one piece of good news for the outlook
within the trade report: Consumer goods imports in the
third quarter barely increased. That suggests retailers are
being true to their word that they were building
inventories cautiously heading into the holiday season in
order to avoid deep discounting.

That strategy looks smart given that consumers are still
quite wary about the economy. The early-November
Reuters/University of Michigan consumer sentiment index
unexpectedly dropped to 66.0, from the final-October
reading of 70.6.

Households were particularly worried about the future,
suggesting another weak gift-giving season this year. But
if retail stocks are already lean, total inventories can’t fall
as sharply as they have in previous quarters. As a result,
the inventory sector could contribute more to fourth-
quarter GDP growth than is now expected.

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