August 23, 2007
Economy at a Glance - August 23, 2007
U.S. trade deficit remains stuck at $60 billion per month
Major “Rules of Thumb” Concerning U.S. Trade
The U.S. trade deficit in goods and services dropped from about $800 billion (annualized) in September of last year to a little over $700 billion in October. It has been stuck there ever since, a period of eight months. This is an ongoing monthly deficit of about $60 billion in both goods and services.
The country-specific make-up of the trade deficit lends itself to three regional groupings. Each of these accounts for about one-third of the total deficit.
China
The goods trade deficit with China in May 2007 was $20.0 billion, which translates to $240 billion on an annualized basis, or 33% of the total deficit. The Chinese yuan has risen about 9% in value versus the U.S. dollar since it was allowed to partially float in July, 2005.
Euro area and OPEC
In May, the U.S. incurred a trade deficit of $7.3 billion (12.2% of the total) with countries that have adopted the euro as their common currency. This is significant, because the euro is the other major currency competing with the U.S. dollar in world financial markets. The euro has climbed about 50% versus the U.S. dollar over the last five years. Within the euro area, the largest U.S. trade deficit, by a considerable margin, is with Germany ($3.9 billion or 6.5%).
The deficit with OPEC nations was $11.0 billion in May, or 18.4% of the total. Within OPEC, three nations were about on a par - Venezuela, $2.53 billion (4.2%); Saudi Arabia, $2.46 billion (4.1%); and Nigeria, $2.39 billion (4.0%). Indonesia was next, at $0.82 billion (1.4%).
Japan, Mexico and Canada
Finally, Japan, Mexico and Canada combined to account for nearly 30% of the total U.S. deficit in the latest month. Japan was out front at $5.93 billion (9.9%), followed by Mexico at $5.87 billion (9.8%) and Canada at $5.17 billion (8.6%).
Implications for Construction
The large monthly trade deficit is a greater potential source of pressure on U.S. interest rates than inflation at this time. U.S. consumer prices remained restrained in May, with the CPI-U increasing 2.7% year over year and core inflation staying low at 2.2%. A large trade deficit can only be accommodated in two ways - a counterbalancing inflow of capital or significant currency adjustment. The Federal Reserve has been holding off on further rate increases, but this will become harder to achieve as rates are raised in other countries and the run-up in U.S. stock markets starts to slow.
Furthermore, the country-specific trade shortfalls quickly establish the product areas where the U.S. has either lost competitive advantage (mainly due to abundant cheap labor elsewhere) or is no longer self-sufficient in resources. These product areas include mass-merchandise manufacturing, such as clothes, footwear and electronics (televisions, VCRs, toys and games) from China, Japan and other Asian nations; motor vehicles from Japan, Korea, Germany and Canada; and oil and natural gas from Canada and OPEC.
With the exceptions of foreign carmakers setting up operations in the U.S. and expansions of energy distribution networks (i.e., pipelines), the construction outlook as a result of investments in these “goods” areas (particularly manufacturing) seems quite limited.
U.S. Foreign Trade - Goods and Services Balance
Based on seasonally adjusted monthly figures, projected at an annual rate.
Data source: U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.
