The trade deficit (total and ex-oil) widens again.
The U.S. trade deficit widened to a record for a fourth straight year in 2005 as Chinese imports poured in and energy prices jumped to their highest ever.
American companies imported $726 billion more goods and services than they exported last year, the Commerce Department said today in Washington. The shortfall in December increased to $65.7 billion from $64.7 billion a month earlier.
Improvement in the trade deficit this year may prove difficult because the U.S. economy is stronger than most of its trading partners, economists said. China accounted for more than a quarter of the total U.S. deficit last year, the most for any country, eliciting a chorus of criticism from lawmakers about the Asian nation’s trade and currency policies.
The difficulty in adjustment is presaged by the continued downward march in the trade balance, even after taking out the effect of petroleum imports.
Source: BEA and Census December 2005 trade release.
As Brad Setser notes in his post on the subject, part of the news in the release is the continued deterioration in the ex-oil trade balance.
The numbers typically reported in the trade announcements are nominal values. Another way of looking at the data is to examine real exports and imports (this can’t be easily done with the NIPA data since those aggregates are chain weighted). Using the BLS’s end-use price indices (which are Laspeyres), I have deflated the exports and imports in order to calculate the real goods trade balance.
Source: BEA, Census, December 2005 trade release; BLS, and author’s calculations
This shows that the deterioration in the measured US dollar trade balance has not been mostly a valuation effect (which would show up in a wide divergence in the nominal and real series), but rather increasing quantities of imports relative to exports. (Note: The series do diverge if one examines the trade balances including oil.) There is some gap during 2003-2004, as the dollar depreciates. but in the last months of 2005, whatever deterioration in non-oil trade balance occurs is due to real quantity movements.
Finally, the last reason to project further deterioration in the 2006 trade balance figures is that 2005 witnessed appreciation in the nominal US dollar in broad terms, in the next figure (all series logged, and normalized to zero in February 2002).
Source: Fed and BLS (prices for export goods, and import ex. oil).
As illustrated above, import prices have risen about 8% for 16% dollar depreciation, while export prices have risen about 10% (all expressed in log terms). The relative stability of the dollar over the last half of 2005, in contrast to 2002-04, suggests that tradables prices will not necessarily continue to move upwards as much as before. This will tend to reduce the (trade balance) stabilizing influences of higher prices. Then improvement in the trade balance will have to be driven by acceleration of rest-of-world growth relative to that in the US.