Figure 1 shows the net exports (red) and net exports ex.-oil imports (blue) as a share of GDP. What is clear is that the sharp decline in the trade deficit is mainly — but not entirely — due to a decline in the value of oil imports.
Figure 1: Net exports (red) and net exports ex.-oil imports (blue) to GDP ratio. Source: BEA NIPA release (31 January) and author’s calculations.
One key question is whether the decline in the value of oil imports is due to a reduction in price or quantity. The fourth quarter decline is largely due to decreasing oil prices (the petroleum and petroleum product price index fell from 242.2 to 202), although, as shown in Figure 2, the quantity fell by 6% (log terms).
Figure 2: Real imports of petroleum and petroleum products, in Ch.2000$ SAAR, in 2006 (blue), lagged one year (red) and lagged two years (green) Source: BEA NIPA release (31 January).
The graph seems to verify press accounts asserting decreased demand due to higher oil prices; in 2004 (green) oil import quantities were trending up, in 2005 (red) they were trending sideways, and in 2006 (blue), trending slightly downward (although the q4 drop might have been accentuated by inventory buildup in earlier quarters in anticipation of an active hurricane season).
Figure 1 also highlights the fact that the ex.-oil trade deficit (as a share of GDP) has been falling gradually over the past year. Nonetheless, the rate of trade deficit reduction has been, in some sense, very slow. In Figure 3, the ex.-oil normalized trade balance, and the trade weighted exchange rate of the dollar lagged two years, are displayed.
Figure 3: Net exports (ex.-oil imports (blue) to GDP ratio, and log real exchange rate of the dollar against broad basket of currencies. Source: BEA NIPA release (31 January), Federal Reserve Board via FRED II, and author’s calculations.
While the trends clearly diverge, the turning points are remarkably correlated. Two years after the 1985q1 peak in the dollar’s value, the US trade balance started to improve. Two years after the 2002q1 dollar peak, the ex.-oil trade balance was still deteriorating. It’s only in the last year that there’s been some improvement, and a gradual one at that.
Goods exports have been growing faster than non-oil goods imports since 2005q2, as shown in Figure 4.
Figure 4: Annual growth rates of real goods exports (blue) and real goods imports ex.-oil (red) (in Ch.2000$), calculated as 4-quarter log differences. Source: BEA NIPA release (31 January) and author’s calculations.
However, since the gap between real exports (blue) and real non-oil imports (red) is so large, export growth must exceed import growth by a wide margin for a very long period in order to close the gap. Hence, despite the rapid pace of export growth and import compression in 2006q4, the gap remains large. In log terms, real non-oil goods imports remain 47% greater than real goods exports.
Figure 5: Log real goods exports (blue) and real imports ex.-oil (red), in Ch.2000$. Source: BEA NIPA release (31 January).
So, good news, but significant challenges remain. And of course, any political crises or oil production disruptions might further widen the total trade deficit. And it is that financial quantity that must be financed by capital inflows from foreign investors and central banks. (Interestingly, non-oil imports tend to decline multiple quarters before recessions, so don’t wish for too many quarters of real ex.-oil import decline…).