June Trade Deficit: Bad News and Good News for All the Wrong Reasons


The linked article reports on the U.S. trade deficit for June, released by the Census Bureau yesterday.  The good news is that it wasn’t as bad as Wall Street had expected.  The bad news is that it’s still really bad – $56.8 billion drained from our economy in only one month, continuing a trend dating back to 1975.  Since that time, the cumulative trade deficit is approximately $9 trillion.  Gee, do you think the U.S. economy could use that $9 trillion right about now?
Back to the June data.  The good news is that exports set a new record.  The bad news is that so did imports.  Records are set almost every month, thanks to inflation.  Also, the bad news is why exports rose – not because of a rebirth of manufacturing in the U.S., but due to soaring grain and oil prices.  
The bad news is that the deficit in oil imports hit a new record, thanks to a record increase in the price of oil.  The good news is that the deficit isn’t quite as bad as the article would have you believe.  
Imports also rose to a record of $221.2 billion, up 1.8% from the May level. But the increase was driven by a 14.6% surge in petroleum imports, which hit an all-time high of $44.5 billion as crude oil prices jumped to record levels.
What they’re not telling you here is that, because the U.S. also exported $8.2 billion of petroleum products, the deficit in oil was $36.3 billion – an annual rate of $438 billion.  
The good news is that, aside from oil, the trade deficit shrank to its lowest level since 2003.  The deficit in manufactured goods was $33.7 billion – an annual rate of about $405 billion, down noticeably from last year.
The country’s goods trade deficit outside of petroleum shrank to the lowest level since February 2003. Demand for a variety of consumer products from clothing to televisions and furniture has weakened, reflecting the sharp economic slowdown in the United States
The bad news is why imports shrank – not because manufacturing is returning to America but because America’s economy is in such terrible shape that demand is down – not just for imported products but for American products too.  A recession isn’t exactly the most effective way to reduce the trade deficit.  We want to reduce it by bringing our manufacturing jobs home, not by destroying Americans’ purchasing power.  
With this slow-down in imports, the recession will now begin spreading to our exporters.  Soon they’ll be cutting costs and cutting prices to recover their shrinking sales volume.  I’ve been predicting another Asian currency valuation crisis, and this may be the catalyst that kicks it off.  (See “The Start of a New Asian Financial Crisis?“)
Finally, expect the trade deficit to rise again next month.  We’ll never see any meaningful reduction until the U.S. returns to sensible trade policies that utilize tariffs to assure a balance in manufactured goods and until the U.S. comes up with an energy policy that frees us of our dependence on foreign oil.  (Halting the exporting of oil would be a good place to start.)

3 Responses to June Trade Deficit: Bad News and Good News for All the Wrong Reasons

  1. Pete,
    Much of the crude oil that is exported is due to the poor quality and cannot be refined in this country or cannot be refined to the point of meeting EPA standards. Some massive work is being done on U.S. refineries to accept the lower grades of crude as the supply of “sweet crude” diminishes. One refinery alone has a construction crew of 7,000 workers doing a multi billion dollar project.

    I often hear that Alaska crude is all exported to Japan. In fact, none of it is exported (my former partner is an engineer at Aleyeska Terminal). Alaskan crude is in fact of a mediocre quality and in the early days some trades were made for sweet crude, but that arrangement no longer exists as we get down to the dredges.

    We also hear the excuse that no refineries are being built in the U.S. due to constraints from the Greenies. The greater constraint is purely economic as the U.S. hit peak oil in 1970 and today we produce 40% less than we did at that peak. Why would new refineries be built at a cost of billions to process a diminishing resource?

  2. Pete Murphy says:

    Mike, you say that much of the exported oil is low grade stuff, but you don’t say “all.” I’ve heard that, in some cases, we actually swap “sweet” crude for lower grade oil for economic reasons that I can’t explain.

    Also, although our oil production peaked a long time ago, our demand for gasoline didn’t. Are you saying that we now import more gasoline instead of refining it ourselves? If not, then we still may need more refineries, even if they are used to refine imported oil. I agree, though. It probably doesn’t make much sense to spend a bunch of money on a resource that’s drying up.

  3. Pete,

    We make the swap for sweet crude that we can refine. It obviously is not a barrel for a barrel swap.

    We do in fact import refined gasoline to the tune of 1.2 million barrels per day rather than crude. This number has continually risen from an average of 160,000 barrels per day in the 80s.

    The oil companies may well have a far more realistic approach to our diminishing oil supply than we would like to believe. Theirs is from a pure economic standpoint.

    It takes years and billions of $$$$ to permit and build a refinery for a product that has seen its peak production. Whatever the energy of the future will be, we can bet the oil companies will be involved and they may be saving up for that day.

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