Trade deficit is going where?
(hat tip Stormy)
Market Oracle has an opinion on where the trade deficit will be headed:
Durable and capital goods
The US’s manufacturing sector is concentrated in industries most vulnerable to an economic downturn, durable and capital goods. Durable goods are products that last for more than three years like SUVs, motor/sail boats, etc. These items are the first areas where consumers cut back spending, which is why the big three are in so much trouble. Capital goods are equipment/machinery used in creating other goods, and the biggest demand for these products has come from emerging markets with their growing manufacturing sectors. With emerging market manufacturing now in contraction, demand for these capital goods is set to disappear, which leaves the US in a disastrous situation:
* We make mining equipment at a time when commodity prices are crashing and mines are shutting down.
* We make construction equipment (caterpillars, pickup trucks, etc…) at a time when global construction is grinding to a halt.
* We make civilian aircrafts at a time when global trade and travel is quickly contracting.
Cheap consumer goods
At the other end of the spectrum from durable and capital goods are the cheap consumer goods found in retailers like Wal-mart. Demand for these lower-end consumer products tends to hold through the severest of recessions, because they are absolutely essential to our modern standard of living. While some current shoppers at Wal-Mart might be forced to cut spending on these essential items, new spending from shoppers who are downgrading from higher end stores will pick up a lot of this shortfall. For example, as more American’s lose their jobs, there will be a lot of consumers downgrading from designer clothes to Wal-Mart’s cheaper clothing. The resiliency of Wal-Mart sale is bad news for the US, as virtually all the retailer’s cheap goods are imports from Asia.
The trade deficit
A quick look at where the US’s trade deficit is concentrated reveals just how grim the outlook is. We are running huge deficits in consumer goods and industrial supplies (oil), which we desperately need, and the only category with a sizable surplus is capital goods (civilian aircrafts, mining equipment, etc), for which global demand is crashing. This explains why the US trade deficit grew in October.
Spencer mentioned in an e-mail that to date he is not sure the deficit is worsening.
I’m not so sure the US trade deficit is worsening.
It did last month, but that looks like one month
of a counter trend movement.
It would be out of line with historic trends
that in recessions imports drop so much
that the US trade deficit improves.
Also note that the I/S ratio is up sharply
this fall and that implies that imports will weaken over
the next 6 months as retailers cut back
on import orders to reduce inventories.
real imports a function of:
1. lagged change in relative import/domestic prices
2. lagged change in domestic consumption
3. current change in inventories.
over an expansion no. 3 is not important,
but in recessions it plays a major role.
Rdan here: What needs to be added to this information? They address different aspects of the same picture.