I’ll get to the recession omen in a moment, but there’s something else about the January trade data released by the Bureau of Economic Analysis on Friday that I need to get off my chest first. If you’ve followed this blog, you know that there may be nothing that galls me more than Obama’s broken promise to fix our trade problems. In the wake of his spanking by Mexico when he tried to broach the subject early in his first term, Obama took the chicken’s way out and, instead of focusing on reducing imports – something that would make him a turd in the punch bowl at G20 meetings, he decided to focus instead on exports, vowing in January 2010 that, within five years, the U.S. would double its exports.
Well, that five year period lapsed a full year ago now, and we know how that turned out. But I’m not letting it go because his failure is growing much worse by the month. Exports fell again in January to their lowest level since July of 2011. Manufactured exports (where the jobs are) led the way, falling by $3 billion to the same level of manufactured exports in December, 2010. Instead of rising by 100% in five years, manufactured exports have now risen by only 17% in six years – and are falling fast. Look at the chart: Manf’d exports vs. goal.
If you pay attention to these sorts of things, you’ve heard the “experts” blame the decline on exports on the strong dollar. But you’ve also heard me consistently maintain that currency valuations have virtually nothing to do with trade imbalances. So why the decline in exports? There are two explanations. The first is the decline in the price of oil. How has that impacted manufactured exports? Oil is priced in dollars and because major oil exporters are then flush with American dollars, they repatriate those dollars by being major consumers of American-made products. When they get fewer dollars for their oil, they have less to spend on imports from America.
The second reason – and now we get to the subject of this post – is that the rest of the world is slipping into recession. There’s already been plenty of evidence of that in data coming out of China, Europe and Japan, where central banks are actually experimenting with negative interest rates in a desperate bid to prop up flagging economies. So the rest of the world is importing less from us.
But look again at the above chart. Not only are our exports declining, but so are imports. Declining imports would be a good thing if the decline were matched by growing manufacturing activity in the U.S. – in other words, a shift of manufacturing back to the U.S. But there’s no evidence of that. American manufacturing remains mired in deep recession. So the decline in imports is an ominous sign of a pull-back in consumer spending in the U.S. – a sign that the U.S. is teetering on the brink of recession like the rest of the world.
No surprise. In January, our deficit in manufactured goods was $57.8 billion, hovering near the record worst level of $63.7 billion set ten months earlier. Over the past twelve months, our deficit in manufactured goods was $682 billion. Here’s a chart of our deficit in manufactured goods, dating back to when Obama vowed to double exports: Manf’d Goods Balance of Trade.
Let’s do some math. Approximately two thirds of the cost of manufactured products is labor (on average). Two thirds of this deficit is $457 billion. Manufacturing jobs pay well – about $50,000 per year. Divide $457 billion by $50,000 and you find that our deficit in manufactured goods accounts for nine million jobs. Nine million jobs lost to idiotic trade policy! That’s enough to put nearly every unemployed American back to work. Is it any wonder that our economy is struggling?
And, by the way, that represents a loss of federal revenue of $100 billion just in personal income taxes alone. That’s matched by an increase in federal spending of an equal amount – another $100 billion – to cover unemployment and other safety net programs for the unemployed. So if you’re a person concerned about federal deficit spending, you really need to turn your attention to the trade deficit.
Or maybe you’re someone concerned about climate change and greenhouse gas emissions. Think about the fact that approximately five billion barrels of oil are consumed every year running ships back and forth across the ocean carrying products that could just as easily be made right in your neighborhood. And those ships are powered by steam turbines that are, in turn, powered by oil-fired boilers burning heavy oil and virtually devoid of any emissions controls. How much sense does that make? (Oh, by the way, all trash generated by the crews of those ships is dumped overboard during the journey.)
OK, now I’m getting way off on a tangent. The point is that running such a massive imbalance of trade (and we’ve been doing it for decades) is a massive drain on our economy, and the latest data contains signs that it’s about to bite us again.