USA Update (Aug. 18, 2005)

US trade deficit has expanded briskly from early 2004 to early 2005, and then it has entered a lull in the spring of 2005. The merchandise trade deficit of America is composed of two major categories; the section of consumer goods and automobiles contributes 60% of the deficit, and the section of industrial and materials that includes oil and other raw materials contributes 35% of the deficit. This year there is a problem in the seasonal adjustment of the deficit of consumer goods, and this disturbance is creating an erroneous signal of the lull in the deficit of that section. Every year the import of consumer goods declines at the late quarter of the year and the early months of the next year due to the passing of the all-important Christmas sale season; the rush to import usually ends a few months before the end of the year. In order to smooth out the seasonal pattern of consumer-goods imports, the import numbers of those months are multiplied by a number larger than 1. On the other hand the import numbers of other months are multiplied by a number less than 1. The weighting factor for each month is determined from historical patterns of monthly import numbers. The seasonally adjusted numbers are a better reflection of the real trend in trade than the widely gyrating non-seasonally adjusted raw numbers. However, this year there is a significant non-seasonal event that throws those seasonal adjustments into disarray; that is the expiration of quota system in the import of textiles. As the quota system on textile imports has expired at the beginning of 2005, the import of textiles has jumped significantly. This sudden jump in the textile imports is a non-seasonal effect, but the statistics published every month can only treat it as a seasonal effect by applying the same weighting factors. Thus in the early months of 2005 the deficits of consumer-goods trade are artificially inflated. By the same phenomena but operated in the opposite direction, the deficits of consumer-goods trade are improperly suppressed in the spring of 2005. Taking those factors into account, the deficits in the consumer-goods sector probably have not experienced much lull in the spring of this year. Another major contributor to the appearance of a lull in the trade deficit during the spring is from the sector of industrial and materials. The lull in this sector is due to a temporal lull in the crude oil price run-up in the spring. As this lull in the oil-price run-up has ended in the summer season, the expansion of the deficit in the industrial and materials sector has resumed in June. We believe that the lull in the trade deficit during the spring ranges from a statistical disturbance to a temporal situation and will disappear as more trade data accumulates in the latter half of the year. We estimate that the trade deficit of 2005 will expand by 10% to 15% from the level of 2004; the lower estimate assumes that the lull in the spring will continue through the year, an unlikely scenario. This means that the ratio of trade deficit to GDP will expand by 5% to 10% in 2005. Thus if the ratio of current account deficit to GDP was 6.0% in 2004, this ratio will expand to 6.3% to 6.6% in 2005.

As discussed in Article 2, trade deficits and economic growth are connected in a rather complicated way, not the monolithic and erroneous version that is still embraced by many "modern" economists and financial analysts. The correlation between the trade deficit and economic growth can be classified into two different phases; the consolidation phase and the "bridge" phase. During the consolidation phase the economic growth and the trade deficit are anti-correlated. This means that less trade deficit leads to lower economic growth and vise versa. During the "bridge" phase trade deficit expands relentlessly whereas the economic growth is sustained at a respectable rate. Since the onset of the globalization scheme of early 1980's, these two phases set in alternatively. During a "bridge" phase everyone becomes euphoric about low inflation and seemingly never ending economic prosperity, and economists and politicians who preside over this phase are hailed as heroes, without knowing that those long running prosperities are borrowed from the rapidly expanding trade deficit, equivalent to the act of "borrow from foreigners and spend". The Reagan expansion and the Clinton expansion are the manifestations of those "bridge" phases. A consolidation phase follows the substantial drop of the value of Dollar. The difficult times after the 1987 stock market collapse followed the massive Dollar revaluation against Japanese Yen in earlier years, and the period after the 2000's burst of dot-com bubble is another example of consolidation phase that was ignited by the twin drop of Dollar in 1998 and 1999. A consolidation phase is eradicated only by the renewed rapid expansion of trade deficit. The explosion of US trade deficit that generated the "bridge" phase of Clinton era expansion in the latter half of 1990's is created single handedly by the massive currency market manipulation of Japanese Government to keep Dollar strong and Yen weak. Currently US economy is in a new "bridge" phase that has started in the latter half of 2003. This phase has been initiated by the renewed currency market manipulation of Japanese Government that has pushed up the valuation Dollar in late 2000. With about 2 years of delay this exchange rate movement was supposedly to boost US trade deficit and thus ushered in a new "bridge" phase for US economy at the beginning of 2003, but the start of the renewed boom was delayed until the latter half of 2003 due to the break out of Iraq war and the SARS scare. The massive currency market manipulation by Japanese Government from the middle of 2003 to the spring of 2004, the massive Dollar buying operation of Chinese Government, and the prolonged phase of "measured" interest hike that has boosted the value of Dollar (see Comment 21 for the "measured" interest hikes and Dollar) guarantee that US trade deficit will continue to expand through 2007 and so is the current US economic expansion; in other words the end of the current "bridge" phase is still not in sight. One thing new about this "bridge" phase is the emergence of China as the surrogate exporter for the capitals of Japan and Taiwan. This means that expanding US trade deficits will lead to continued rapid Chinese economic expansion. Since China is still a developing economy and is far less energy and material efficient than the developed economic entities like America and Japan, this new "bridge" phase will ensure a high commodity prices due to the strong demand from China. High commodity prices will in turn reduce the possible growth rate of US economy by a certain degree compared to the earlier "bridge" phases.