Exports & Imports Still Falling

The sharp improvement we have seen over the last year in the trade deficit looks like it is coming to an end. As the chart below (from http://www.calculatedriskblog.com/) shows, a year ago we were consistently running trade deficits in excess of $60 billion a month. But since the start of the year, deficits below $30 billion have been the norm. In April, the deficit was $29.2 billion, up from $28.5 billion in March. A year ago the deficit was $62.2 billion.

However, a very large portion of the improvement that we have seen over the last year has been due to the falling price of oil.  In April, the price of imported oil averaged $46.60 — today oil is trading over $70 a barrel (there is not an exact one-for-one correspondence between the price of imported oil and the quoted price of WTI or Brent, but it is close). This means that the oil portion of our import bill should expand significantly in May and June.

This is not a good omen for the second quarter GDP report. Keep in mind that net exports added almost two full percentage points to growth in the first quarter. In other words, had the trade deficit not improved, we would have seen the economy sink at a 7.7% annual rate in the first quarter rather than at a 5.7% rate.

Thus while the deterioration in April was minor, the absence of that positive will be a negative for GDP. With the trade deficit likely to slip back further in May and June due to oil, it may turn into a significant negative.

The improvement in the trade deficit over the last year has come the “wrong way.” It is due to a reduction of imports rather than from an expansion of exports. Both have been plunging, but over the last year, imports have declined by 30.7% while exports have “only” fallen 21.8%. The reduction in imports was largely, but not entirely, due to falling oil prices.

In April, we exported $121.1 billion, a 2.3% decline from March exports of $123.9 billion. We imported $150.3 billion a 1.4% decline from March imports of $152.5 billion. Put another way, in April we exported $0.806 for every $1.00 we imported, in March we exported $0.812 for every $1.00 we imported. However, in April of 2008 we exported just $0.713 for every dollar of imports.

One non-oil area that also deteriorated in April was the trade deficit with China, which expanded to $16.8 billion from $15.6 billion in March.

While the very strong rebound in oil prices (more than doubled from their lows) is good news for E&P companies like EOG Resources (EOG: 75.25 0.00 0.00%) and XTO Energy (XTO: 41.64 0.00 0.00%), it is probably even better news for the deepwater drillers like Transocean (RIG: 83.95 0.00 0.00%) and Diamond Offshore (DO: 91.63 0.00 0.00%). It is not good news for the rest of the economy, and by extension the rest of the market.

The current price level of oil is not yet fatal to hopes that the economy might recover, but it sure does not help matters. It is one more factor that suggests that if we get an end to the recession in the second half of the year that it will be extremely anemic, with unemployment continuing to rise well into 2010, and most likely clearing the 10% level before this year is over.