Reporting/Market Focus from the December 2004 Edition of the SGS Newsletter

The monthly reporting of the U.S. International Trade in Goods and Services has two components of widely varying quality. The goods component is of eventual good quality, backed by a full paper trail, in theory, of all import and export transactions. Since the import detail has a better paper trail (collection of duties, etc.), U.S. export numbers are honed through a series of monthly crosschecks with trade data and better paper trails published by major U.S. trading partners. The services component is largely a guesstimate provided by the same people who give us the GDP report. Services trade reporting is of significantly worse quality than the goods reporting.

Although now published jointly by the Census Bureau and the Bureau of Economic Analysis, in the pre-Clinton Era, the monthly trade data were published only for merchandise and only by the Census Bureau. At the time, the services trade balance was guesstimated only quarterly, for purposes of GNP and current account balances. Chances that monthly guessing would be more meaningful than quarterly guessing were zero, but since the merchandise trade deficit was constantly getting worse, and the services sector was in surplus, publishing the two series together would make what would still be a net monthly deficit appear smaller. That was done. The services surplus still is meaningless on a monthly basis and has been shrinking since the late-1990s, often contributing to the widening of the monthly trade shortfall.

In early reporting on the merchandise side, there was a substantial problem in the recorded timing of exports and imports. Although an import actually took place in April, for example, it got counted only in the month in which the paperwork cleared U.S. Customs, in April, perhaps, or June or even December. The reported monthly trade flows were nothing of the kind; they were instead a record of U.S. Customs paperwork flows, which varied sharply month-to-month and quarter-to-quarter. Distortions were so bad that the dependent quarterly GNP reports were thrown off sharply.

The problem also was bad enough to allow an easy manipulation of the paperwork flows and reported trade deficit in late-1987 and early-1988, as part of the effort by the Federal Reserve and U.S. Treasury to stabilize the U.S. dollar in the air pocket that followed the disorderly markets of October 1987.

At that time, the Census Bureau recognized and addressed the problem, reducing paperwork flow variations from double-digit billions of dollars to less than $2 billion per month, at present.

The paperwork "carryover" is estimated each month to be the same as was seen the month before, and it is revised and corrected for known carryover in the next month’s reporting. In the annual benchmark revision, all known residual carryover effects are restated into the correct months.

The services sector also is revised monthly, but its quality does not improve. Recently, for example, methodology was changed so as to introduce "smoothing" techniques in insurance payment and premium flows. This was done primarily to remove the volatility seen in the services sector and GDP in the aftermath of the Sept. 11 terrorist attacks.

In general, though, since the better-quality merchandise numbers still outweigh the poor-quality service sector numbers, the reported monthly deficits tend to be meaningful. At a record level now, they are going to get worse.

The decline in the dollar’s value that follows a deepening trade deficit is not quite the self-correcting mechanism economic theorists would like to think. More than price drives demand for non-commodity goods manufactured outside the United States. Quality and features are important. With the use of creative hedging tools, importers can do much to mitigate the impact of a weak dollar.

Does the trade deficit matter? In broad economic terms, it is a direct subtraction from GDP. In magnitude, the elimination of today’s record trade deficit would add over 5% to current GDP and create a net 7.3 million new jobs. That would be enough to eliminate the discouraged workers, who cannot find jobs in areas of the country where manufacturing has shifted offshore. That is enough to bring anactual unemployment rate of about 12.4% down to around 7.8%, and the official 5.4% U-3 unemployment down to around 3.5%. Unfortunately, the outlook for the U.S. trade deficit is not for a turnaround.