JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 COMMENTARY NUMBER 278
Annual and December Trade Deficit

February 10, 2010

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December Trade Deficit Should Knock 1.1 Percentages Points
Off 4th-Quarter GDP Growth

Storm-Delayed Economic Reports

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PLEASE NOTE: The next Commentary will be coincident with the release of January retail sales report, originally scheduled for Thursday, February 11th, now delayed to Friday, February 12th, due to disruptions from extreme weather. With the federal government closed down for three-plus business days, additional or other delays in scheduled releases would not be surprising.

– Best wishes to all, John Williams 

Trade Deficit Deterioration Pummels 4th-Quarter GDP Guesstimates. As noted in Commentary No. 277 and Commentary No. 274 U.S. trade deficit reporting for October and November indicated a deterioration in the seasonally- and inflation-adjusted fourth-quarter 2009 trade deficit against the third- quarter number. A deteriorating trade deficit is a net negative for GDP as reflected in the Net Exports category. Yet, the Bureau of Economic Analysis (BEA) assumed in its "advance" guesstimate of fourth-quarter GDP that the yet-to-be-reported December deficit would show an improvement, and generated 0.5 percentage points of the 5.7% annualized quarter-to-quarter real GDP growth in estimated for the fourth-quarter from that assumption. Today (February 10th), the BEA and Census Bureau reported the December deficit showed significant deterioration, with the effect — by itself — of wiping out roughly 1.1% of the gimmicked 5.7% GDP growth, suggesting a downward revision to a still incredible (as in unbelievable) 4.6% annualized real growth rate.

Inflation-adjusted monthly estimates on the goods trade balance are available in Exhibit 11 of the trade report. Working through the annualized quarterly changes versus the GDP estimates suggests a negative swing (greater deficit, weaker GDP) in real net exports of about $36 billion or about 1.1% in annualized real GDP. While the estimate does include the impact of the trade balance in services, that guesstimated category usually shows minimal volatility. There also will be other revisions to the GDP estimate.

For December 2009, the BEA and Census Bureau reported the nominal (not adjusted for inflation) seasonally-adjusted monthly trade deficit at $40.2 billion, up from an unrevised $36.4 billion deficit in November, but down from the $41.9 billion deficit of December 2008. The reported deficit shrank in 2009 by 45.3%, to an estimated $380.7 billion from $695.9 billion in 2008. The drop in the deficit was 20.1% after the effects of inflation were taken into account. The inflation impact largely reflected a sharp decline in the average price of oil. 

For the month of December, the not-seasonally-adjusted average price of imported oil was $73.20 per barrel versus $72.54 in November 2009 and against $49.87 in December 2008. For 2009, the average price of oil was $56.92, versus $95.22 in 2008. In terms of not-seasonally-adjusted physical oil imports, December 2009 volume averaged 8.938 million barrels per day, versus 8.182 million in November and 10.324 million in December 2008. For 2009, the average volume of oil imported was 9.074 million barrels per day, versus 9.810 million in 2008.

In terms of the three largest U.S. trade deficits with its trading partners, the deficits with China and Mexico (of NAFTA) had the smallest declines. The largest deficit remained with China (excluding transshipments through other countries), although it shrank by about 15% to $226.8 billion in 2009, versus $268.0 billion in 2008. 

The U.S. deficit with NAFTA shrank by 53% (down 74% versus Canada, down 27% versus Mexico), to $67.8 billion ($20.2 billion Canada, $47.5 billion Mexico) in 2009, from $143.1 billion ($78.3 billion Canada, $64.7 billion Mexico) in 2008. Much of the decline in the deficit related to NAFTA appears to have been due to systemic disruptions from the bankruptcies of General Motors and Chrysler.

The third largest annual U.S. trade deficit was with Japan, although it shrank by 40% to $44.8 billion in 2009, down from $74.1 trillion in 2008.

The narrower nominal deficit was due primarily to the impact of the severe economic contraction and lower average oil prices, not due to a sudden new competitiveness of U.S. industry.

Week Ahead. CAUTION: Due to the ongoing weather-related shutdown of the federal government, scheduled economic release dates are at fair risk of being delayed. The outlook for January CPI, PPI, Industrial Production and Housing Starts — all tentatively scheduled for the holiday shortened next week — will be covered in Friday’s Commentary. Given the underlying reality of a weaker economy (and likely re-intensifying downturn in the coming months) and more serious inflation problems than generally are expected by the financial markets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the months ahead. Such is true especially for economic reporting net of prior-period revisions. 

Retail Sales (January 2010). Now due for release on Friday, February 12th, January’s monthly retail sales are expected to show a 0.5% gain, following a 0.3% contraction in December (per Briefing.com). Reporting risk is to the downside, and inflation-adjusted growth likely will be flat-to-minus on both a month-to-month and year-to-year basis.

GAAP-Based Financial Statements of the U.S. Government (2009). The Treasury’s GAAP financial statements tentatively are scheduled for release on Tuesday, February 16th. The statements were delayed, without explanation, from the regularly scheduled release date of December 15, 2009. A Reporting Focus Commentary will follow after I have had a chance to assess the report. A table of what I expect in the summary reporting is available in the Hyperinflation Special Report.     

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