The Bureau of Economic Analysis announed this morning that the U.S. trade deficit fell dramatically in December to $38.5 billion – down from $48.6 billion in November. (See the full report.) Exports were up and imports were down sharply. Experts hailed this as good news – further evidence of improvement in the economy.
Just don’t look at the report too closely. Yes, exports were up. Exports of manufactured products rose by $2.2 billion, but from a fairly depressed level. Here’s a chart of how manufactured exports have tracked since President Obama set a goal in January of ’10 of doubling exports in five years: Manf’d exports vs. goal. The rise in exports was a step forward, but in the one-step forward and one-step-back pattern that persisted throughout 2012. The rest of the $3.9 billion jump in exports is explained by oil exports ($0.9 billion), services exports ($0.6 billion) and a small increase in food exports ($0.1 billion).
Imports fell a sharp $6.2 billion. Oil imports fell by $3.8 billion. Not a surprise, when you realize that oil stockpiles are at historically high levels – 372 million barrels (as announced by the Energy Information Administration on Wednesday). Manufactured imports declined by $2.3 billion. That would be good news if it could be explained by some change in trade policy that was bringing manufacturing back home. But no such change in trade policy has taken place. The only change in trade policy in 2012 was the enactment of a new free trade pact with South Korea. The result? While our overall trade deficit fell by 3.5% in 2012, our trade deficit with South Korea worsened (as I predicted, contrary to the president’s claim that this was a big win for the U.S.) by 25%.
A more likely explanation for the drop in imports is a slow-down in the economy, just as we saw imports decline at the onset of the recent “Great Recession.” This drop in imports is just further evidence (on top of the 4th quarter decline in GDP followed by an up-tick in unemployment in Janaury) of an economy that’s stalled and on the brink of decline.
Take a look at this chart of our monthly trade deficit: Balance of Trade. Now take a look at this chart of the balance of trade in manufactured goods: Manf’d Goods Balance of Trade. We’re beginning to see clear evidence of a decline in our overall trade deficit but, at the same time, the worsening trend continues in manufacturing (in spite of the slight improvement in December). The former is evidence of a slowing economy. The latter is a continuation of the long-term decline in manufacturing that’s been going on for decades, thanks to trade policy that doesn’t account for the role of population density disparities in driving global trade imbalances.
By the way, we are now a full three years into President Obama’s five-year plan to double exports. In order to meet that goal, exports need to be rising at a rate of 15% per year. How’d we do in 2012? Exports rose only 4.4%. Most of that increase can be explained by inflation alone. December marked the 17th month in a row that overall exports have lagged the president’s goal. And it’s the 15th month in a row that manufactured exports have failed to keep pace.
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