The Census Bureau released the figures for the September, ’08 trade deficit yesterday. Forget about the headline number, the drop from $59.1 billion in August to $56.5 billion. That was all due to falling oil prices. The real story is that, once again defying economists predictions that the falling dollar would help our trade deficit, the deficit in non-petroleum goods actually jumped last month. Exports of non-petroleum goods (basically, manuctured goods), fell by $7.0 billion while imports fell by $5.2 billion, adding $1.8 billion to the deficit and raising the deficit in manufactured goods to $35.6 billion. That’s an annual rate of over $427 billion.
Also, during the month of September, the trade deficit with China, where the value of the yuan has risen more than 20% over the past year, soared to a new record of $27.8 billion, from $25.3 billion in August. And the deficit with Japan rose to $5.6 billion from $4.8 billion in August. One of the few bright spots was a decline in the deficit with Mexico, falling from $5.9 billion in August to $4.9 billion in September.
Also, it’s important to note that the headline number represents the total trade deficit, including our surplus in services. Take out that surplus and you’re left with a “goods” trade deficit of $69.6 billion, up from $67.7 billion in August. That’s an annual goods deficit of $835 billion.
It should also be noted that the headline trade deficit figure is a “seasonally adjusted” number. The actual goods trade deficit in September, not seasonally adjusted, was $76.0 billion, vs. the reported $69.6 billion. I wasn’t able to find the methodology that Census uses for doing its “seasonal adjustments,” but I’m sure that it involves factoring out seasonal rises and declines in the prices of some goods. But one has to wonder if it opens the door to manipulating the data to make it appear better than it really is. You may think, “Naaah, the government wouldn’t play tricks on us like that, would they?” Maybe. Maybe not. But it’s a fact that the government has a long history of adjusting methods for tracking data in a self-delusional quest to make the economy appear rosier than it is, in order to prop up consumer confidence.
The important take-away from this data is that, contrary to what other economists tell you, we cannot rely on the falling dollar and other currency valuations to cure our trade deficit. It won’t work because, as I’ve pointed out over and over, the trade deficit has nothing to do with currency valuations. It has everything to do with the relative state of over-supply of labor among our trading partners. You can never compete your way out of a trade deficit with a nation more over-supplied with labor than your own. They’ll match you dollar for dollar on every cut in cost and every improvement in productivity, all in a more desperate bid to keep their bloated labor forces occupied. The only way to eliminate the deficit is by making their products more expensive at the point of entry into the U.S., and that means tariffs!
By the way, free trade cheerleaders love to jump all over reports like the one just released for September, when they show a month-to-month improvement in the trade deficit, and bally-hoo them as proof that we just need to stay patient and let adjustments in currency valuation work their magic. Well, here’s a chart of the monthly data going back two years, taken straight from the Census Bureau’s FT900 report. (Click on the following link.)
Do you see even an iota of improvement? I sure don’t!
By the way, in case you were wondering why oil prices have fallen so dramatically, the data contained within the FT900 report from the Census Bureau provides the answer. Oil imports fell off a cliff in September. In September of last year, we imported 391.6 million barrels of oil. This year that fell to 339.0 million barrels. Although oil imports have fallen almost every month of 2008 vs. 2007, they dropped precipitously in September. I suspect that the October drop will be even greater. The lesson here is that there is nothing like high prices to drive energy efficiency.