From the Economic Policy Institute
Trade deficits still rising in most industries
despite strong export growth
by Robert E. Scott with research assistance from Lauren Marra
Exports of U.S. manufactured products have grown rapidly since 2002. However, U.S. trade balances in eight out of the top 10 exporting industries have worsened since 2002, despite strong growth in the value of exports. In fact, industries with declining trade balances have outnumbered those showing improvement by almost 4-to-1. Rapid growth in imports has more than offset gains in exports sales in most industries. The United States imported 68% more manufactured goods than it exported in 2006. Essentially, this imbalance means that exports will have to grow 68% faster than imports just to keep the U.S. manufacturing trade deficit from growing worse than it already is.
Changes in trade flows since 2002 for the top 10 U.S. exporting industries are shown in the chart below. The United States is a major exporter of what are known as advanced capital goods, which include aircraft and parts, agricultural and construction machinery, navigational equipment, electronic medical equipment, and other electronic goods such as semiconductors. However, since 2002, trade balances have worsened in eight of those industries (see chart), with the United States having an actual trade deficit in seven of them.
SEE CHART
U.S. exports of manufactured products will have to grow much more rapidly in the future in order to stabilize and reduce the U.S. trade deficits. The good news is that prospects for a manufacturing recovery are good if appropriate steps are taken to support export growth.
Check out the archive for past Economic Snapshots.
A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues, Snapshots are updated every Wednesday.
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Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Tuesday, February 13, 2007
Tuesday, December 19, 2006
U.S. current account deficit exceeded $900 billion for the first time in the third quarter
The Article Was Published by the Economic Policy
Institute on : December 18, 2006
by Robert E. Scott
The Bureau of Economic Analysis announced today that the current account deficit reached an all-time high annual rate of $902 billion in the third quarter, an increase of $34 billion over the previous quarter.1 The deficit increased to 6.8% of gross domestic product, an increase of 0.2 percentage points. The deficit was also the second the highest ever, as a share of GDP. The growth of the current account deficit was caused by rapid growth of imports from China and in crude oil and petroleum products. These imports were also responsible for 61.6% of the total current account deficit in the third quarter. Although declining oil prices may reduce the deficit in the fourth quarter, the rapid growth in Chinese imports and in interest payments to foreign holders of government debt will continue to put upward pressure on the current account deficit in the future.
by Robert E. Scott
The Bureau of Economic Analysis announced today that the current account deficit reached an all-time high annual rate of $902 billion in the third quarter, an increase of $34 billion over the previous quarter.1 The deficit increased to 6.8% of gross domestic product, an increase of 0.2 percentage points. The deficit was also the second the highest ever, as a share of GDP. The growth of the current account deficit was caused by rapid growth of imports from China and in crude oil and petroleum products. These imports were also responsible for 61.6% of the total current account deficit in the third quarter. Although declining oil prices may reduce the deficit in the fourth quarter, the rapid growth in Chinese imports and in interest payments to foreign holders of government debt will continue to put upward pressure on the current account deficit in the future.
The U.S. deficit on goods and services trade increased $7.2 billion (3.9% at a quarterly rate2) in the third quarter alone. Imports increased $17.3 billion (3.2%) to $566 billion, the highest rate since the fourth quarter of 2005. Oil imports increased $4.9 billion (6.2%) to $84 billion.3 Imports from China increased $10.3 billion (15.1%, not seasonally adjusted) to $78 billion. U.S. exports rose $10 billion (2.8%) to $366 billion in the third quarter, the slowest rate of growth in the past year.
Imports were 38.7% larger than exports in the third quarter. Exports would have had to increase 38.7% faster than imports (or 4.0%) just to keep the trade deficit from growing. In the absence of a dramatic and sustained slowdown in U.S. growth, exports can grow more than 40% faster than imports only with a substantial reduction in the value of the U.S. dollar. When the dollar rises in value, U.S. exports become more expensive and import prices fall. Between 1995 and 2002, the dollar gained about 30% in value, as shown in the chart below. As a result, the U.S. trade deficit has grown from about 1.5% of GDP to 6.8%, which experts believe to be far above a sustainable level. In order to reduce the deficit back to a sustainable level of less than 3% of GDP, the dollar must fall by at least 30% to 40% to reduce export prices and achieve the needed increase in export growth, relative to imports. A falling dollar will also raise import prices, slowing import growth and increasing demand for goods produced in the United States.
East Asian governments' practice of propping up the value of the dollar to promote their export-led growth is the largest barrier to needed dollar adjustments. Although the U.S. dollar has fallen 12.3% in value since 2002:II, this decline has not been sufficient to slow the growth of the trade deficit. Although the real value of the dollar has fallen 23.0% against a basket of major currencies in this period, it has fallen only 2.6% against a group of other important currencies, particularly the Chinese yuan. Much more depreciation will be needed to substantially reduce or eliminate the deficit. Foreign central banks, which purchase treasury bills and other government securities to suppress their currencies, financed 35.8% of the U.S. current account deficit in the third quarter. Asian governments were responsible for all of these dollar purchases.
Net income on foreign investments, including interest payments on the rapidly growing stock of foreign debt, increased $1.7 billion in the third quarter and was responsible for nearly 20% of the increase in the current account deficit. Rapidly growing interest payments to foreign holders of U.S. securities are responsible for this entire income deficit, and those payments will grow rapidly in the future for two reasons. First, foreign holdings of U.S. treasury securities are expected to grow rapidly to finance growing current account deficits. Second, rising interest rates could cause payments on existing debt to increase sharply in the future even if the deficit is reduced.
As long as the United States maintains sizeable current account deficits, net borrowing and payments to foreign investors will continue to grow. The standard of living of future generations will be depressed by the need to pay for today's heavy borrowing from abroad.
For more information about the current account deficit and the costs of foreign borrowing, see the December 2004 Issue Brief, Debt and the Dollar, by EPI economist L. Josh Bivens.
Notes1. The current account is the broadest measure of the U.S. balance of trade in goods, services, and payments to the rest of the world.
2. Trade data presented at quarterly rates for comparison purposes.
3. U.S. Census Bureau, FT900: U.S. International Trade in Goods and Services, October 2006. Petroleum imports are seasonally adjusted. Imports from China are not available on a seasonally adjusted basis and tend to surge in the third quarter in anticipation of holiday sales.
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Friday, December 8, 2006
Keep Your Eye on the Batter in China
By David Whitehead
Publisher, Business Insider Magazine
Note: This column was originally slated to run in the "Selling the South Bay" issue, which was published third quarter 2006. It was cut do to space considerations. Due the rapid decline of the dollar on the world maket in the weeks proceeding this posting, this column turned out to be more timely than I originally thought.
Most realtors are first and foremost sales professionals. And every successful professional knows that in order to close the deals, you need to keep your eye on the ball in front of you. The problem is that ball may be landing in the South Bay, but the batter that hit it deep into left field is across the sea in China. What does this mean for you as a local real estate professional? If you really understand what creates value in the home you are selling today, you might conclude foreign investment matters more in determining the price of a South Bay home than an ocean view on The Strand. At least it does if you take the long view.
During the long real estate boom that started in the mid ‘90s, China was simultaneously evolving into a global manufacturing powerhouse. To accomplish this, it first needed cash to feed its voracious economic engine, and, second, it also required an endless supply of affluent customers to buy its products. Not surprisingly, the United States turned out to be China’s best customers. To expedite this process, the Chinese deliberately pegged the Yuan at a very low exchange rate against the U.S. Dollar, making them hands down the most competitive outsourcers in the world.
Global corporations took full advantage of cheap offshore production resources to boost their profits. Meanwhile, American consumers—even those who lost their manufacturing jobs to China—weren’t shy about buying up the cheap goods that flooded the U.S. domestic market.
What did China gain? Foreign investment and cash for one thing; however, not nearly enough to fuel its rapid growth. In order to keep those appreciative American consumers consuming, China started investing heavily in U.S. Treasury bills, thereby giving then-Federal Reserve Chairman Alan Greenspan a powerful tool to keep both long- and short-term interest rates at record lows for years. This allowed him to expand the money supply much further than he could have otherwise without risking serious inflation.
To put the new economic scenario into perspective, during the late ‘80s when Greenspan didn’t have huge reserves of foreign cash to boost the domestic economy, some people blamed his policies for forcing President George Bush Senior to break his “read my lips” pledge on no new taxes, which in the wake of the early ‘90s recession, fated him as a one-term president.
Bill Clinton and George W. Bush haven’t had that problem. Throughout this boom period, China has invested heavily in U.S. Treasury bills. They are literally lending American consumers the very money they are using to buy Chinese products, although this is being done indirectly through the Federal Reserve.
China is not the first country to invest in U.S. Treasury Bills to keep its export market going. Japan did this during its manufacturing boon years. Japan is still the largest single holder of these securities, with $682 billion as of October 2005. China is the second-largest holder with $248 billion. China is catching up fast and the pace of that growth created an unprecedented economic dichotomy between what nation states produce and what they buy. The trade deficit with China alone represents over $202 billion of the astronomical $723.6 billion U.S. trade deficit reported in 2005.
Clearly, a global economy based on the same money flowing back and forth during an economic expansion wasn’t much different than paying past bills with new credit cards, so it eventually proved unsustainable. There hasn’t been a hard landing yet, however, China has halted its policy of pegging the Yuan against U.S. Dollar and now hedges it against a basket of foreign currencies, albeit still too low for the taste of Americans concerned about the across-the-board dismantling of domestic manufacturing. This in turn weakened the U.S. Dollar on the global market. With oil prices above $70-per-barrel and climbing, serious consumer inflation is now a real risk.
Chinese investment in the U.S. economy has artificially suppressed long-term interest rates at the Federal Reserve for several years. If it pulls back investing at current levels (which frankly would be in its long-term economic interests because it needs more diversity in its export policy), current Fed Chair Ben Bernarke will have to take more drastic action to stave off inflation than the 17 consecutive quarter -percent interest rate hikes we have seen until just recently.
Publisher, Business Insider Magazine
Note: This column was originally slated to run in the "Selling the South Bay" issue, which was published third quarter 2006. It was cut do to space considerations. Due the rapid decline of the dollar on the world maket in the weeks proceeding this posting, this column turned out to be more timely than I originally thought.
Most realtors are first and foremost sales professionals. And every successful professional knows that in order to close the deals, you need to keep your eye on the ball in front of you. The problem is that ball may be landing in the South Bay, but the batter that hit it deep into left field is across the sea in China. What does this mean for you as a local real estate professional? If you really understand what creates value in the home you are selling today, you might conclude foreign investment matters more in determining the price of a South Bay home than an ocean view on The Strand. At least it does if you take the long view.
During the long real estate boom that started in the mid ‘90s, China was simultaneously evolving into a global manufacturing powerhouse. To accomplish this, it first needed cash to feed its voracious economic engine, and, second, it also required an endless supply of affluent customers to buy its products. Not surprisingly, the United States turned out to be China’s best customers. To expedite this process, the Chinese deliberately pegged the Yuan at a very low exchange rate against the U.S. Dollar, making them hands down the most competitive outsourcers in the world.
Global corporations took full advantage of cheap offshore production resources to boost their profits. Meanwhile, American consumers—even those who lost their manufacturing jobs to China—weren’t shy about buying up the cheap goods that flooded the U.S. domestic market.
What did China gain? Foreign investment and cash for one thing; however, not nearly enough to fuel its rapid growth. In order to keep those appreciative American consumers consuming, China started investing heavily in U.S. Treasury bills, thereby giving then-Federal Reserve Chairman Alan Greenspan a powerful tool to keep both long- and short-term interest rates at record lows for years. This allowed him to expand the money supply much further than he could have otherwise without risking serious inflation.
To put the new economic scenario into perspective, during the late ‘80s when Greenspan didn’t have huge reserves of foreign cash to boost the domestic economy, some people blamed his policies for forcing President George Bush Senior to break his “read my lips” pledge on no new taxes, which in the wake of the early ‘90s recession, fated him as a one-term president.
Bill Clinton and George W. Bush haven’t had that problem. Throughout this boom period, China has invested heavily in U.S. Treasury bills. They are literally lending American consumers the very money they are using to buy Chinese products, although this is being done indirectly through the Federal Reserve.
China is not the first country to invest in U.S. Treasury Bills to keep its export market going. Japan did this during its manufacturing boon years. Japan is still the largest single holder of these securities, with $682 billion as of October 2005. China is the second-largest holder with $248 billion. China is catching up fast and the pace of that growth created an unprecedented economic dichotomy between what nation states produce and what they buy. The trade deficit with China alone represents over $202 billion of the astronomical $723.6 billion U.S. trade deficit reported in 2005.
Clearly, a global economy based on the same money flowing back and forth during an economic expansion wasn’t much different than paying past bills with new credit cards, so it eventually proved unsustainable. There hasn’t been a hard landing yet, however, China has halted its policy of pegging the Yuan against U.S. Dollar and now hedges it against a basket of foreign currencies, albeit still too low for the taste of Americans concerned about the across-the-board dismantling of domestic manufacturing. This in turn weakened the U.S. Dollar on the global market. With oil prices above $70-per-barrel and climbing, serious consumer inflation is now a real risk.
Chinese investment in the U.S. economy has artificially suppressed long-term interest rates at the Federal Reserve for several years. If it pulls back investing at current levels (which frankly would be in its long-term economic interests because it needs more diversity in its export policy), current Fed Chair Ben Bernarke will have to take more drastic action to stave off inflation than the 17 consecutive quarter -percent interest rate hikes we have seen until just recently.
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