Summary
It is all but certain the US trade and current-account deficits are succeeding -- finally -- in having a negative impact on the dollar's exchange-rate value. Tomorrow (5/12), the Commerce Department will release trade data for March. Here are some thoughts in advance of that report.
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Introduction
Over the last several weeks, the US dollar's exchange rate value has taken a serious beating. As of yesterday's close, the Dollar Index had sunk to levels not seen in more than a year, but a year ago, the index was trending up. That rally took the index to a final high of a little over 92, set last October. Since then, this closely watched measure has fallen more than 8%, with an inordinate amount of the overall damage occurring since the end of March.
Can there be any doubt that the nation's record current-account and trade deficits have begun to take a serious and growing toll on the dollar? I think not. In turn, I believe the dollar's slide also has begun to make an increasing contribution to the poor recent performance at the longer end of the Treasury yield curve.
And if the dollar continues its swoon, can a negative impact on the US stock market be avoided much longer? To this, my answer is the same as above: I think not. I remind readers that the stock-market crash in October 1987 began months earlier as a dollar problem, that then became an interest-rate problem, that then became a stock-market problem -- a very, very big stock-market problem!
Tomorrow (5/12), the Commerce Department will release trade data for March. In advance of that report, following are some numbers to look at and to think about.
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* The February trade deficit (goods and services) was reported at $65.74 billion, down approximately $2.8 billion or 4.1% from January's record deficit.
* February's shortfall was the result of imports totaling $178.73 billion (down $4.19 billion or 2.3% from January), and exports totaling $112.99 billion (down $1.34 billion or 1.2% from January).
* Through the first two months of 2006, the US trade deficit totaled $134.33 billion. This was almost $16 billion or 13.5% above 2005's January-February total of $118.38 billion.
* January's revised gap of $68.6 billion was the largest ever. Following are the six biggest monthly deficits on record, through February 2006. Note that all six occurred over the last six months:
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SIX LARGEST MONTHLY
TRADE DEFICITS
(Goods and Services)
---------------------------
Amount
Year Month (Bils.)
---------------------------
2006 January $68.588
2005 October $67.836
2006 February $65.742
2005 September $65.585
2005 December $65.074
2005 November $64.462
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* The current consensus estimate for the March trade deficit is about $67 billion, which would represent a widening of about $1.3 billion or 1.9% from February. (The originally reported February total will be revised, however.)
* When the Commerce Department reported its advance estimate of first-quarter gross domestic product on 4/28, it did so using an estimated figure for the March trade deficit. Therefore, the actual March trade result, along with revisions to prior data, could have some impact on the next GDP estimate, due out at the end of May. GDP is reported on a quarter-over-quarter basis, at annual rates. Based on the numbers currently available, following is a comparison of the trade figures for last year's fourth quarter and this year's first.
(NOTE: In GDP parlance, the trade deficit is known as "net exports," and if this series is negative, it represents a dollar-for-dollar subtraction from gross domestic product.)
Trade Def.
Mo./Yr. (Bils.)
-------------------
02/2006 $ 65.742
01/2006 $ 68.588
-------
Total $134.330
Avg. $ 67.165
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12/2005 $ 65.074
11/2005 $ 64.462
10/2005 $ 67.836
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Total $197.372
Avg. 65.791
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* Were the March deficit to come in at the estimated $67 billion, and were there no revisions to the January and February data, then the first-quarter average would come in at $67.110 billion, which would be $1.319 billion higher than the fourth-quarter average. Multilpy by four and the difference would be about $5.3 billion. This methodology merely provides an approximation, however, because there are adjustments made that preclude a simple one-for-one pass-through.
* In mid-March, the Commerce Department released preliminary current-account data for last year's fourth quarter. The report indicated a record fourth-quarter deficit of $224.88 billion, up $39.45 billion or 21.3% from the third quarter The entire 2005 shortfall came in at $804.95 billion, an increase of $136.87 billion or 20.5% from 2004.
* Over the last three years, the cumulative US current-account deficit totaled an astounding $1.993 trillion:
A B
--- ---
Current-Acct. Trade
Deficit Deficit*
----------------------
Year (In Billions) B / A
-------------------------------------
2005 $ 804.945 $ 723.616 89.9%
2004 668.074 617.583 92.4%
2003 519.679 494.814 95.2%
-------- -------- ----
$1992.698 $1836.013 92.1%
======== ======== ====
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*Goods and services.
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* As the above numbers indicate, the trade deficit represents the lion's share of the overall current-account deficit. Therefore, unless there is a legitimate reason to project a significant decline in the nation's trade gap, there is little reason to project much shrinkage in the current-account deficit.
* At first blush, the contraction shown above in the trade deficit's contribution to the current-account deficit would appear to be a positive development. It is not, though, because it merely reflects the rapid growth in other imbalances -- for instance, the growth in this country's negative investment flows. For example, when Tout TV and others in the regular propaganda loop extol how nice it is that foreign investors continue to snap up all those Treasury securities, remember that the Treasury not only incurs a growing liability to foreign entities on its balance sheet, but it also incurs the requirement to pump even more dollars into overseas' hands via interest payments.
* There is justifiable concern about what level imbalances must reach before they create severe strains on the stability of the US financial markets. As mentioned earlier, 1987's stock-market crash had its roots in a slide in the dollar that put major upward pressure on US interest rates. By the autumn of 1987, the severe drop in the dollar and sharp rise in open-market interest rates caught up with the equity market -- in a major way.
* As of 1987's September quarter, the quarter closest to the stock crash, the nation's current-account deficit had risen to about 3.3% of current-dollar GDP. As of the end of 2005, the figure had reached a hefty 6.2%:
A B
--- ---
Current- Current-
Account Dollar
Deficit GDP
---------------------
As Of (In Billions) A / B
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12/31/05 $804.95 $13020.9 6.2%
09/30/87 $159.17* $ 4767.8 3.3%
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*Annualized; full-year 1987 was $160.66.
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* The huge amount represented by cumulative current-account deficits over the years has resulted in ever-larger amounts of foreign ownership of US financial assets. In modern times, the United States was a net debtor by a modest amount coming out of World War II. Net financial claims swung back to a positive number thereafter and remained positive until the mid-1980s -- through 1984 to be exact, with the US swinging back to a net-debtor status in 1985. The table below shows what has taken place since. Please note that at the end of 1987, not long after the October stock-market crash, the imbalance shown below was a "mere" $320 billion, versus more than $5.8 trillion as of the end of 2005.
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FOREIGNERS' U.S. FINANCIAL
ASSETS/LIABILITIES
(Billions of Dollars, Latest Data
Released 03/09/06 Through 12/31/05)
------------------------------------------
Total Total
As Of Financial Financial
12/31 Assets Liabilities Difference
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2005 11154.3 5344.4 5809.9
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2000 6584.9 3562.3 3022.6
1990 1999.5 1419.1 580.4
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1987 1354.0 1033.6 320.4
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1985 966.7 872.3 94.4
1984 804.5 835.6 -31.1
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1980 494.2 660.9 -166.7
1970 110.0 146.0 -36.0
1960 38.9 63.4 -24.5
1950 17.4 30.0 -12.6
=======================================
1945 16.3 14.9 1.4
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Source: "Flow of Funds Accounts
of the United States" (Federal
Reserve "Z.1" release).
------------------------------------------
* In past work on the US trade deficit, I've broken out a good deal of specific information regarding US crude oil imports. In future work, I am going to integrate more data on imports of refined product, since this area represents significant dollar volume. In the meantime, though, following are recent trade numbers relating specifically to crude oil. (NOTE: These are not seasonally adjusted.)
* For the first two months of 2006, the US imported approximately 594 million barrels of crude oil, valued at $31.36 billion. In turn, this worked out to an average price per barrel of $52.81. During the same period in 2005, the United States imported about 620 million barrels, valued at $22.35 billion. This equaled an average price per barrel of $36.07. Thus, in 2006 to date, import volume fell roughly 4.2%, but owing to the higher per-barrel price, total cost was up $9.01 billion or a very substantial 40.3%.
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