U.S. and Canadian Trade: More Bad News

August 11, 2010

Good recessions are supposed to cleanse economies of structural impurities, so that faster, more sustainable long-term expansion is possible.  A primary imbalance of the old regime involved huge balance of payments imbalances.  Surpluses in China, Japan, and Germany were unsustainably larger as were the deficits of the United States, Spain and Greece.  These patterns are returning even more quickly than I anticipated.  Another element of the imbalanced pre-recession economy, the very low U.S. savings rate, shows a more enduring repair.  After hovering near zero for years, such is back above 6% and thus inside the historical 6-8% corridor.  The savings rate is nearer normal levels because unemployment is unacceptably high.

China yesterday reported its largest trade surplus ($28.73 billion in July) since January 2009, and the United States just announced an 18.8% widening of its monthly goods and services trade deficit to a 20-month peak of $49.9 billion.  The deficit was also 17% wider than analyst consensus expectations.  Export volumes fell 1.6% on month, while import volumes rose 4.8%.  The data imply much weaker second-quarter economic growth than the 2.4% annualized pace reported initially and suggest the weakness may gather further momentum in the third quarter, dropping to nearly zero.  The inflation adjusted goods and services trade deficit widened 17.7% from $45.992 billion in May to $54.136 billion in June and from $42.5 billion per month in the first quarter to $48.1 billion per month in the second quarter.  China accounted for a third of the incremental deterioration between May and June, and Japan and the euro area were together responsible for slightly over a fifth of such.

More times than not, a deterioration in U.S. trade is associated with an improvement in Canadian trade, but that failed to happen in June or the second quarter.  Canada recorded a CAD 1.13 billion trade deficit in June, 62.7% bigger than in May, and a deficit of CAD 534 million per month in 2Q compared to an average surplus of CAD 388 million in 1Q.  Nominal exports dropped by 2.5% in June, twice as much as the decline in imports.  Exports of industrial goods and materials plunged 7.1% on month, while energy shipments fell 5.5%. 

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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