U.S. Trade Improves But Not for Long

The country’s trade balance has improved so far this year.  According to the Commerce Department, the balance of U.S. exports over imports showed a deficit of some $200 billion between January and May, the most recent period for which complete data are available.  This is down from $208 billion during the same period last year and $206 billion for this same five-month stretch in 2014.  Dollar depreciation against most other currencies no doubt helped produce this improvement, but more likely it reflects the slowdown on the pace of U.S. economic growth.  Since the rest of the world will continue to suffer from extremely sluggish growth and this economy may well pick up a bit from its recent, especially disappointing performance, the trade improvements recorded so far will likely reverse during this second half of the year.

Up until the middle of last year, dollar strength worked against U.S. trade.  From mid 2014 to mid 2015, the dollar rose almost 20 percent against the Japanese yen, for instance.  Accordingly, the global prices of US-made goods rose against their Japanese competition, handicapping U.S. exports to both Japan and to third markets.  The relative currency movements also made Japanese imports more attractively priced to both American consumers and as inputs to American production processes.  An even stronger 30 percent dollar appreciation against the euro had comparable effects in competition with European-made, mostly German products.  Sterling’s decline of some 6 percent against the dollar gave British goods and services a similar, if slightly less extreme edge against their American competition.  And a reversal in the long appreciation of the Chinese yuan by some 5 percent offered an extra advantage to that country’s exports.

This year, much of this adverse currency picture has reversed.  From mid 2015 to date, the dollar has dropped more than 5 percent against the euro and some 25 percent against the Japanese yen.  In neither case are valuations back to when they were in 2014, but the moves have relieved some of the competitive pressure American producers faced last year.  Brexit kept sterling down.  It has fallen an additional 15 percent against the dollar during this time.  Ongoing fears about Chinese development also kept the yuan sliding an additional 8 percent or so against the dollar from late 2015 to the present.  But the gains of the yen, the euro, and most other currencies nonetheless have relieved earlier valuation pressures and no doubt contributed to the trade improvement.

More significant, however, is the relative U.S. economic slowdown.  No economy has shown impressive growth in this recovery, but until this year the United States had shown a significant lead over others.  Europe as a whole has barely produced positive growth.  Though some nations have done better, none have grown close to their averages from before the great recession of 2008-09.  Japan had a brief growth spurt but has since lapsed — again — into recession.  China has slowed from real annual growth rates in the 10-12 percent range to 6-7 percent according to official figures that almost certainly overstate.  Although this Chinese growth is far above rates in the developed world, it nonetheless constitutes an even sharper slowdown from the past.  While the United States, too, has expanded at a disappointing rate, the 2.4 percent a year real growth averaged in 2014 and 2015, though well below the economy’s historic averages, came closer to them than the rest of the world did to their historic averages.  Then in the first quarter of 2016, the last period for which complete data are available, the annualized U.S. real growth pace slowed to a mere 1.1 percent, and demand for imports slowed in tandem.

These growth effects are evident in the relative movements imports and exports.  Just about all the improvement in the overall balance of trade comes from a drop in U.S. goods imports.  Goods exports continued to fall.  After a 7.2 percent decline between May 2014 and May 2015, reflecting both the poor performance of economics overseas and the effects of the dollar’s appreciation during this time, they dropped another 6.1 percent to May of this year, even as the dollar declined on foreign exchange markets.  Services, usually less sensitive to both price and overall levels of growth, have hardly changed at all.  The same is true for services imports.  The 4.2 percent drop in U.S. goods imports from May 2015 to this May more than made up the difference.

Looking ahead, the balance of probabilities would seem to point to some deterioration in the trade balance during this second half of the year.  To be sure, a more complete dissipation of the earlier panic over Asian prospects could promote further dollar depreciation on foreign exchange markets, but the dollar is just as likely to appreciate as the full extent of Brexit becomes apparent in Europe.  If then the probable currency effects are balanced, there is a firm likelihood of stronger U.S. economic growth going forward than occurred in the first quarter.  To be sure, nothing like a surge is likely, certainly not up to the old, long-term average, but still a return to the averages of 2014 and 2015 would suck more imports into the country and erase the modest trade improvement recorded so far.

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