Tuesday, January 13, 2009

U.S. Trade Deficit - There's Good News and Bad News

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. Trade Deficit dropped by a whopping 29% in November, one of the biggest drops in history, if not the biggest. Much of the 'improvement' was accounted for by price changes in imports (the numbers are not adjusted for inflation or deflation as is the case for most U.S. government economic reports) Nevertheless, both imports and exports declined significantly, indicating a shrinking global economy. Imports of course dropped much more than exports and this took place because of falling oil prices.

Oil prices (the U.S. is a major oil importer) have the biggest influence by far in determining the U.S. Trade Deficit. The trade deficit overall dropped 29% and oil imports dropped by a similar amount. Based on the average price for a barrel of oil used in the report, oil prices dropped 27% during the month, although the report itself states that 'petroleum prices' fell 32%. Imports of industrial supplies, the category in the report that includes petroleum products and natural gas, fell by 25%. Based on these figures it looks like a little less oil is being consumed by the U.S., but not much. Almost the entire change is merely a change in pricing.

On the flip side of the equation, imports were also falling in November, but that decline seems somewhat more related to an actual drop in trade than a drop in prices. U.S. exports of industrial supplies, capital goods, autos, consumer goods, and food and feed all fell. The one significant rise was in the aircraft category, which jumped 7.1%. This was caused by a strike in Boeing ending and should be assumed to be a one-time event. Drops in imports and exports of services were approximately equivalent.

The average price of a barrel of oil used for the November report was $66.72 a barrel and oil has fallen much lower since then. 'Improvements' in the U.S. Trade Deficit are likely for the next few months because of this. As the price of oil gets to its cost of production, the 'improvements' will disappear however. When the price of oil rises again, the 'improvements' will reverse. The drop in U.S. exports is actually the much bigger story. It was a collapse in U.S. exports that was a key marker of the Great Depression in the 1930s.


Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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