Our Trade Deficit Is Shrinking Finally

TW: After years of deterioration our trade deficit is shrinking very rapidly. Part of the improvement relates to plunging oil prices but part of it is attributable to our economy's shift away from consumption. Recall the simple equation:

GDP= P+I+G+X (where P= personal consumption, I= investment, G= government spending and X= net imports/exports)

The G and X components are keeping the U.S. economy from truly plunging. The Q1 GDP was off over 6%, without strong G and improving X it would have been off 10% plus.

The adjustment in the trade deficit is needed as part of the U.S. economy's molting process away from too much consumption. The transition will be painful. As the trade deficit swing shows economic re-balancing can happen very quickly in fact too quickly. What is unclear is how the world economy will adjust to a U.S. absorbing far fewer goods from the rest of the world. It is entirely possible the trade deficit will grow again rapidly if U.S. consumption rises faster than international consumption.

Furthermore, while adherents of both the left and the right generally agree a move away from over reliance on consumption is good for the U.S. economy (although they strongly disagree on how to accomplish the shift), I remain skeptical that the vast majority of the general public realize what such a shift entails. It is more than sacrificing some luxury goods, it also involves facing up to things such as runaway health care spending, unsustainable social security outlays and defense spending at levels 3X anyone else in the world.



From Floyd Norris at NYT:
"THE American trade deficit is collapsing at the fastest rate ever, a testament to the ability of a worldwide recession to sharply reduce global economic imbalances that had grown to unprecedented size.

...Few countries have reported first-quarter data as yet, and the American number will be revised. But what appears to be happening is that much of the pain from the fall in American consumption is being felt in other countries, since exporters in those countries supplied the products that Americans are no longer buying.

Declining trade deficits in the United States are likely to be matched by falling trade surpluses in countries that have historically been net exporters. That is one reason Germany’s economy appears to be faltering badly and China has embarked on a huge economic stimulus program.
The shrinking trade deficit is not being caused by a rebound in American exports. They are falling as well, but not nearly as much as imports are declining.

...For many years, critics of American economic policies, particularly in Europe, have said that the United States had to take action to reduce its trade deficit. Now that the reduction has happened, it is they who are among the most hurt by it.

Robert Barbera, the chief economist of ITG, pointed out that the elimination of the trade deficit — an idea that seemed beyond belief only a few months ago — could be within reach. The United States, he said, does not have to develop some new export industry. It simply has to refrain from importing more when exports recover to last year’s level.

For anything like that to happen, however, the engine of recovery in the world would have to be a country or region other than the United States, whose own recovery would need to be gradual and based in large part on growth overseas.

That seems unlikely to happen. Some countries that historically ran large trade surpluses are in no position to use fiscal stimulus to accelerate growth in their economies, because their own access to international credit markets has been damaged. Others, including most of Western Europe, have so far resisted large stimulus packages.

In the United States, however, the stimulus efforts have been very large, and that seems likely to continue. That same G.D.P. report showed a mild and tentative rebound in consumer spending in the first quarter. If that continues, the trade deficit may soon start to widen again."
http://www.nytimes.com/2009/05/02/business/02charts.html?_r=1&scp=1&sq=floyd%20norris%20trade%20deficit&st=cse