Saturday, July 12, 2008

A Little Insight into the May Trade Report

The headline in the NY Times says the improvement is the result of a weak dollar, but, as usual, we learn more from folks like Brad Setser and Menzie Chinn, along with a quick perusal of weekly petroleum delivery data from our hardworking friends at the US Energy Information Agency.

For once, oil imports are down, even on a value basis. A 10% physical decline in imports is consistent with a 6% decline in total physical consumption. A rough cut at the EIA delivery data, however, shows a decline of only about 1% from April to May. The interesting information is not the total, though, but the composition. Motor vehicle and aircraft fuel were up, but were more than offset by large declines in heating fuels. There is no evidence of seasonality in these series, so we can’t jump to conclusions, but it may not be unreasonable to suppose that this boost to the US trade position is less sustainable than a similar reduction in travel might be. Those who follow these fuel data more closely than I do should feel free to chime in.

Meanwhile, if Chinn is right and contemporaneous measures may be overstating GDP, some to all (or even more than all) of the trade improvement could be attributable to a US slowdown. This is entirely in line with economic theory, but it is not such good news: if the US has to bring down its trade deficit substantially on the back of its economic growth, we are in for one long, miserable ride.

Actually, it’s worse than that, since, in the context of existing financial fragility, a slump in the real economy portends disorder in financial markets. One reason among many: the longer and deeper the incipient recession, the further and faster housing prices will fall, and the greater will be the default risk so liberally distributed across a range of credit instruments. And to return to my repeating nightmare, it is near certain that any serious implosion of US financial markets will morph almost immediately into a dollar crisis. If I were Ben Bernanke I’d be laying in a supply of my favorite hard stuff.

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