The Census Bureau announced this morning that the U.S. trade deficit in February plunged by 28.3% from $36.2 billion in January to $26.0 billion in February, stunning experts who had forecast a small increase of $0.5 billion.
I, too, was shocked. At first, I suspected that this dramatic decline was simply further evidence of just how bad the economy has gotten. And that does account for the bulk of it. Imports fell dramatically almost across the board (with the exception of a small rise of $0.41 billion in the Census Bureau’s “other” category). The decline in imports accounts for $7.56 billion of the $10.2 billion improvement in the trade deficit. And, since reduced oil prices and demand account for only $1.1 billion of this, the vast majority of the decline in imports is in manufactured goods. Imports of autos fell by almost $1 billion. Industrial supplies (which includes oil) fell by $3.58 billion. Capital goods fell by $1.92 billion and consumer goods fell by $1.39 billion.
None of the decline in imports is terribly surprising. It truly is a measure of just how bad the economy is. The market for autos alone is down by about 40%. But, as bad as our economy is, this enormous decline in imports has made the economies of export nations that much worse. So, what’s so surprising about the February trade report is a rise in U.S. exports of $2.6 billion. Even more surprising is that half of that increase is in exports of consumer goods. Perhaps most surprising of all is that exports of American-made autos rose by almost a half billion dollars!
Some may respond that all of this is the kind of rebalancing of trade that is a natural result of the decline in the dollar. But the data doesn’t support such a conclusion. Yes, the dollar has declined but, unless that translates into rising import prices and falling export prices, it will have no effect. In a separate report this morning, the Bureau of Labor Statistics announced that, while export prices fell (month-to-month) by 0.6%, non-oil import prices actually fell by 0.7%. This should tend to worsen, not improve the trade deficit.
If other economies are plunging faster than ours and currency valuations aren’t having any real effect on prices, then we should have seen a decline in exports that at least matched the decline in imports. So how does one account for exports actually rising by $2.6 billion in this economic climate? Back in February, I speculated that the administration, while professing a desire to avoid protectionism, was working quietly behind the scenes to get other nations to voluntarily help the U.S. reduce the trade deficit. (See “Administration Working Quietly on Trade Deficit While Disavowing Protectionism?”) It seems that, among the global community, there is general agreement about the critical role that the global trade imbalance (specifically, the U.S. trade deficit) had in causing the global financial and economic collapse. But to give the Obama administration credit for this would be disingenuous. I’m sure that efforts were already underway to address this problem before Obama arrived. There’s simply no way that anything he said or did since taking office on January 20th could have so dramatically impacted the February U.S. trade deficit.
I believe that the rise in U.S. exports is evidence of a concerted effort by the rest of the world to correct this trade imbalance by boosting their imports of American products in an effort to head off protectionist measures by the U.S. The question then is how long they’ll be able to sustain that effort, with their own economies plunging and their unemployment rates soaring. Especially when the U.S. economy begins to improve and U.S. imports begin to soar again, will they be able to boost their imports of U.S. products even faster to keep pace? I predict that they won’t.
But for now, let’s just enjoy the fact that, for whatever reason, the U.S. trade deficit is dropping like a rock. This is fantastic news. If this continues, it’ll dramatically improve our economic outlook. It’ll be very interesting to see how this continues to play out in the coming months. Stay tuned.