Saturday, March 13, 2010

Decline In Trade Deficit A Bad Sign For The Economy

In years past, word that the US trade deficit had shrunk was generally greeted as good news. Not so today.

This week we learned that the trade deficit shrank unexpectedly, from $39.9 billion in December, down to $37.3 billion in January. This was due to a big drop in the importation of oil and foreign autos.

But here's the strange part; US exports declined as well, yet the gap still shrank. That's how low consumer demand is in the US right now.

Both are very bad signs for the US economy.

With American consumers financially tapped out, the US needs a strong export base to help begin its recovery. Though the US exports have been continually declining for years, the sales of civilian aircraft, machinery, and agricultural products dropped in January, a worrisome sign that the global economy is still on weak legs.

Of equal concern, a decline in oil imports indicates a decline in energy usage. While many may herald that as a positive sign for our oil addicted nation, it portends the continued sluggishness of the US economy. A lack of energy consumption indicates a slackened economic base and a lack of growth.

What's more, the nation's bill for imported petroleum plunged 5.4% in January to $25.4 billion, despite a higher average price for a barrel of oil. So, even as oil got more expensive, Americans spent less on it.

And the decline in foreign auto imports indicates the lack of demand by US consumers. Though car sales increased by 6%, year-over-year, in January, they were generally sluggish and disappointing since most fell from December levels.

For the most part, even the car companies that reported increases still suffered from declining sales to consumers, a sign of the continuing challenges facing the industry. The increases were due to big jumps in fleet sales to government and businesses, particularly rental car companies.

Though China reported that its exports rose in February by 45.7% from a year earlier, US consumers clearly weren't the reason why. Imports from China fell to the lowest level since June.

As the US manufacturing base has declined in recent decades, and as imports of oil and cheap foreign goods have increased, the trade imbalance skyrocketed. In 2006, the trade deficit rose to a record $817 billion, before coming down during the Great Recession.

In fact, things have been so out of balance that the last time the US had a trade surplus was 1975.

A trade surplus is preferable to a trade deficit since it generally implies that a nation's goods are competitive on the world stage, its citizens are not consuming too much, and that it is amassing capital for future investment and economic pursuits.

However, every year that there has been a major reduction in economic growth, it has been followed by a corresponding reduction in the US trade deficit. And, historically, the deficit has shrunk more so during times of recession – like right now.

That's a reason for concern since the trade gap had reached an eight-year low in 2009. In other words, the shrinking trade deficit contradicts any suggestion that a recovery is taking root.

A drop in global oil prices and the deep recession that cut the demand for foreign goods (even as it hurt US exports) has led to the trade deficit's decline.

A weaker dollar has also made US goods cheaper in foreign markets.

However, with exports accounting for just 13% of the US economy, the nation can't expect to export its way out of this recession. And the decline in imports is just further evidence of the retrenchment of US consumers.

The broad view indicates that we're still a long way from recovery.

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