Is the government actually forecasting a narrowing of the U.S. current account deficit?
This is a follow up to an article I wrote earlier this week, Older workers working longer; labor-force participation falling. In response to the article, which highlights the BLS employment and labor-force participation projections for 2008-2018, 2slugbaits (a loyal AB commenter) presented the following point:
The 2 industry sectors expected to have the largest employment growth are professional and business services (4.2 million) and health care and social assistance (4.0 million).
Put another way, employment growth will be in nontradeable goods sectors, which suggests we might have to sell a lot of assets in order to pay for imports.
Is the government actually forecasting that Japan an China will finance the U.S. trade deficit for the next ten years? I assumed (silly of me) that any government (BLS) projection would be based on such international pledges as the U.S.-China Strategic and Economic Dialogue:
To this end, both countries [U.S. and China] will enhance communication and the exchange of information regarding macro-economic policy, and will work together to pursue policies of adjusting domestic demand and relative prices to lead to more sustainable and balanced trade and growth.
…and more specifically…
The United States will take measures to increase national saving as a share of GDP. The U.S. household saving rate has already risen sharply as a result of the crisis, contributing to a significant decline in the U.S. current account deficit, and the United States will adopt policies that will continue to encourage household saving.
The U.S. commitment: grow national saving as a share of GDP and significantly reduce the current account deficit. According to the BLS long-term forecast, the U.S. will make good on just one the these two pledges.
The table below extracts national saving and the current account from the BLS 2018 economic assumptions for the employment projections (Table 4.3).
Note: two identities are needed: (1) National Saving is Income minus Consumption minus Government Spending, and (2) the Current Account is National Saving minus Investment. The BLS projects GDP rather than GNP = GDP + net receipts from the rest of the world. In using GDP as the definition of “income”, net receipts from the rest of the world is zero, and the current account reduces to net-exports.
To be sure, the BLS does forecast that U.S. national saving rate will rise 67.5%, from 9.3% of GDP in 2008 to 10.2% in 2018. But domestic investment rises by more, +72.1%. Therefore, the current account deficit grows by 81.3%.
I’m not seeing any healthy reduction of the current account deficit by 2018. 2slugs is right: the BLS is essentially forecasting that China and Japan (among other perpetual savers) will finance a growing U.S. trade deficit. Oh man.
Rebecca Wilder
Why is this surprising? Until China abandons its currency policy its has to keep buying US dollars.
Hi Rob,
It’s surprising because this is a long-term forecast, rather than one just two years out. It is impractical to assume that international imbalances like this can continue for the next 8 years. There are forecasts that include a falling consumption share and current account deficit by 2018. Global Insight is one; the firm is expecting the US consumption share to fall to 68.5% by 2018 (BLS forecast is essentially unchanged from the current 70% of GDP), and that of the current account to -2.8%.
Rebecca
Knowing what is assumed in data is always valuable. Such data and assumptions can point to possible policy options for the general reader as well.
The debate on tariffs and effectiveness of these tariffs is heating up. However, I have seen little written on a pro-active trade policy that can involve the national imagination, such as green jobs and savings for a purpose, which is a counter to the attitude of financing consumption through debt.
I think Rebecca has already written on the long un-winding of our mutual dependence between the US and China.
Many health care providers are looking for ways to cut staff and payroll costs, in the face of reform uncertainty, Medicare cuts, and a possible Medicaid meltdown in 2010 – 2011 fiscal year.
Pegging health care as the job provider of the future may be premature.
Healthcare providers are cutting. Per diem workers and nurses are facing increased patient load. I see a lot of part time work advertised (less than half-time) , which makes a position per diem in effect in this arena. I also see doctors fighting tooth and nail to support their own incomes, especially specialists, in the funding scramble, so where are reductions in costs to be made in lieu of more funding for primary care and fewer procedures?
There is no reason we could not see both staffing reductions now in health care and job growth over the next decade in health care. An aging population is likely to increase demand for health care services – this is not news, right? We are also just coming through the biggest economic dislocation in a lifetime at the same time the health care sector faces a large regulatory change, so employment patterns we are observing now are unlikely to be permanent.
As to the point of the initial post, it seems to assume a constant consumption pattern. We will need to borrow lots from abroad to pay for imports because we will continue to import lots of goods. The very fact that BLs expects job growth in non-tradable areas assumes a rise in demand for non-tradables. Why do we assume the balance remains toward a wide trade gap?
Aging households tend to have a fully stocked home and garage, often facing reducing their material holdings to move to a smaller home. The assumption of rising demand for workers in non-tradables sectors seems likely to be based on the notion that an aging population will spend more on non-tradables.
If you are going to make arguments based on equilibrium thinking, you need to think about equilibrium all the way around the loop.
Hello kharris,
To be sure, non-tradeables, like healthcare, will be one driving force behind consumption spending in aggregate. However, if equilibrium is going to move toward a more sustainable international balance, then the trade gap must, by definition, tighten.
This is the conundrum that I see in the BLS forecast. To be sure, a growing non-tradeables sector does not preclude the balancing of trade – that’s just population dynamics (as you suggest). But a constant consumption share does.
Rebecca
Hello kharris,
To be sure, non-tradeables, like healthcare, will be one driving force behind consumption spending in aggregate. However, if equilibrium is going to move toward a more sustainable international balance, then the trade gap must, by definition, tighten.
This is the conundrum that I see in the BLS forecast. To be sure, a growing non-tradeables sector does not preclude the balancing of trade – that’s just population dynamics (as you suggest). But a constant consumption share does.
Rebecca
First of all, this is all kind of hallucinogenic. Unless the BLS has staff clairvoyants, there is no way they can project much of anything reliably beyond the end of next week.. V shaped recession? U shaped recession? Lost Decade? Without knowing which, how can future US economic trends be projected?
Second, the current account deficit depends largely on two factors — consumer spending and petroleum imports. Thanks to CAFE standards, the recession and low natural gas prices due to a windfall of new supply, petroleum imports may actually be trending down long term. But even if they are headed down, it’s going to take many years for them to cease accounting for 30-50% of the current account deficit. Future crude oil prices probably will depend increasingly on the economies of the large countries in the developing world and less on the economies of the US and EU. Short to medium term, the petroleum component of current account deficit is something we don’t have a lot of control of over.
Third. Increased savings surely implies less consumer spending. That probably would mean a lousy economy and poor growth. The enthusiasm for that — especially amongst the free lunch crowd — is going to be very limited.
The free lunchers are very numerous and are still a powerful political force despite their evident incompetence and their absolutely awful record of mismanagement of the economy.
Fourth. I’d agree with STR and the others. If we actually make an attempt to control healthcare costs, healthcare employment trends are going to be down, not up. And if we don’t control costs, the healthcare system will probably collapse and healthcare employment trends probably will be down anyway.
VTC,
The original point, as I understand it, had to do with the consistency between various agency forecasts. It is had to forecast, as you point out. That doesn’t excuse producing forecasts that are inconsistent, which is what Rebecca seems to have in mind. I’m not sure we know enough to declare them inconsistent. A higher savings rate and a shift in domestic demand toward non-tradables – which is what is implied by a forecast of job growth in the non-tradables sector – both argue for a narrowing in the trade bap, all else equal. Rebecca’s point seems to have to do with a (relative) shift in labor away from tradables. However, given the far larger size of the domestic market, a shift in domestic demand patterns seems to me up to the task of offsetting a shift in production toward domestic demand. Doesn’t have to work out that way, but it is not impossible.
And I would say again, we need to avoid confusing short-term developments – cost cutting in health care – with longer term outcomes. I will need more medical services (if I/m lucky) a decade from now than I need today, and there are more people in my age group in this country than in younger, less sickly cadres. Cutting the cost of delivering an individual unit of care is just what you’d expect when the number of units demanded goes up. It is because the number of units demanded is going up that cost cuts have become critical. There is no way of knowing from here whether cost cutting or increased units will be the bigger influence. Health care can (and probably should) become a larger part of US output, even if the cost per unit falls.
I fail to see the problem. The Chinese and Japanese believe they can get a better ROI by investing in America products (e.g., securities). Having lived through the last Japanese “investment in America” boom–look at the sale prices of Rockefeller Center, for instance–I’m skeptical they are correct, but perfectly willing to take their money in their effort to prove me wrong.
Ken,
Setting aside the glee of watching “them” get egg on their face for buying at the high, there is more than the casino aspect of investment at work here. Selling assets outside the country means that a claim on activity inside the country. A greater share of domestic earnings is paid out over the border in the future as the cost of consuming more than we earn now. Given that we consume a butt-load already, maintaining our level of consumption now at the cost of paying off debt for years to come seems a bad idea.
***The original point, as I understand it, had to do with the consistency between various agency forecasts. It is had to forecast, as you point out. That doesn’t excuse producing forecasts that are inconsistent, which is what Rebecca seems to have in mind. ***
I don’t really disagree. But I’d point out that normally when one makes projections, they can simply project that things next year will be like this year except maybe a bit more so. Throw in a few corrections for events that will predictably occur and leveling of some unsustainables and you have a forecast. Forecasts will differ some, but probably there will be common threads.
This year however we are spending hundreds of billions of dollars to try to ensure that the next years will not look like the past one. We don’t even care all that much how they are different, so long as they are different. That makes prediction, always difficult, a lot harder. Inconsistency is probably to be expected when everyone is guessing.
I do not see what the problem is here.
Non-tradeable or services sector employment should grow faster than employment in the tradable sector because productivity is the non-tradable sector is lower. This has no implication for the trade deficit. Over the past decades manufacturing employment was weak for two reasons: productivity and the trade deficit. If manufacturing productivity remains strong manufacturing employment should also be weak regardless of what happens to the trade deficit. Faster employment growth in health care and business services alone does not necessarily have to imply anything about the trade deficit.
Guest,
Isn’t it a little hard to simultaneously assume that employment growth will be in low productivity sectors and that there will be an increase in savings?
There are very few rocks not overturned in the BLS analyses. Reading some of the comments on this thread raises the question of whether the BLS EPP data was carefully reviewed. It doesn’t appear that some bothered to give it much of an effort.
A few friends and I have about 12-15 manhours in studying and cross referencing the various pieces of the EPP information, beginning with a review of the November 2009 Monthly Labor Review which includes five key articles outlining projections. Then it was on to the main body of BLS Economic and Employment Projections (EPP) data. The EPP methodology is explained; others can challenge it, but I think it’s reasonably sound. There are 38 EPP tables. Moreover, the BLS National Private Sector Business Employment Dynamics Data By Major Industry Classification series provides 96 charts and 192 tables of historical data. Taken together, the picture makes sense.
There’s not much point in responding on the blog when it’s obvious that some other parties haven’t bothered to review the source data. No point in doing their homework. Among the 38 EPP tables, there are a few key tables that easily refute some of the commentary on this thread.
The BLS EPP series could serve as the baseline for the majority of future discussions on economic and employment outcomes. I would make good use of it if I was a main poster.
Hi MG,
Man I had just written an entire reply to you and then clicked on cancel – oh well.
I am familiar with the literature, and definitely applaud your efforts to dig down deep into this report. I saw that it had been released, and then a day later I was still sifting through the information. A wealth of information to say the least.
However, the model is based on the Macroeconomic Advisers model, which is arguably less “global” than some. For example,, the November Review lists this as the following reason for the current account deficit widening: “The BLS projects the current-account deficit to be 5.1 percent of GDP by 2018, reflecting an expectation of continued foreign investor confidence in the U.S. economy.”
That is not an innocuous statement – and I know of other forecasts that certainly do not include a current account deficit widening to 5.1% of GDP. In fact, Global Insight forecasts the CA deficit falling to 2.8% of GDP in that same year.
The population projection seems to be the least contentious part of the forecast. However, the composition of job growth is dependent on the composition of production – and that is model-dependent.
Best, Rebecca
Hi, Rebecca.
I assume that you are referring to IHS Global Insight. Their website states that they employee 3,800 people in 20 countries. I expect that their model should be far superior on internation data considering the available inputs and country level projections captured by their employees. How does one gain access to their data without client subscription? Have you seen a ten year projection report? Available online?
BLS confirms your point about the model that BLS is using:
Chapter 13. Employment Projections, BLS Handbook of Methods – “Recent projections have been based on a macroeconomic model developed by St. Louis-based Macroeconomic Advisers, LLC (MA). This model has 744 variables descriptive of the U.S. economy. Of these, 134 are behavioral equations, 409 are identities, and the remaining 201 are exogenous variables, including key assumptions such as monetary policy, fiscal policy, energy prices and supply, and demographic changes.”
Info from MA, LLC:
Structure of the Macroeconomic Advisers’ Macro Model of the U.S.
The Washington University Macro Model (WUMM) and the WUMMSIM Software
http://www.macroadvisers.com/csx3/csxPage.asp?AppName=Macroecon&Label=CSXGETPAGE&Class=Macroecon.pclsTemplates&Method=pageTemplate1&Message=WUMMSIM%7CPAGE_WUMM%7C2
*See chapter one (only chapter available without client subscription)
I found the following presentation in their Public Reading Room.
Structure of the Macroeconomic Advisers’ Macro Model of the U.S.
http://www.macroadvisers.com/content/Structure_and_Use.pdf
“The Foreign Sector
-Six Foreign Trade-Weighted Series
G-36 exchange rate* (PFXB)
GDP* (GDPFB)
Foreign producer price* (PPIFB, PPIFN)
Foreign consumer price* (PCPIFB)
Real Government bond yield* (RGBFN)
-The exchange rate equation combines notions of L-R PPP, S-R interest arbitrage, relative growth effects, and CAB effects.
-Foreign growth and inflation are predominantly determined by their own past history and U.S. growth and inflation.
-Foreign Rates adjust gradually to U.S. rates
* Denotes estimated equation”
Rebecca,
I would like to say that I agree with IHS Global Insight’s 2.8% Current Account deficit projection for 2018. The simple fact is that I can’t support that conclusion. My inclination at this point is to project a CA deficit of at least 4%, with the possibility that it will rise to 5.5% or higher.
Admittedly, I view the BLS projections in some aspects as being very optimistic. I don’t believe, for example, that the U.S. will increase employment by 15.3 million by 2018. I expect that the U.S. will be fortunate to increase employment by 9-11 million. BLS is projecting a net decline of 1.2 million in manufacturing. I expect that the losses will be much larger due to a combination of factors. And, yes, I reviewed Tables 2.7, 5.1, and 5.2 as well as other source information in reaching that conclusion. I believe that the hit will be larger, though I was surprised at some projections in Table 2.7.
I am expecting an explosion in commodity prices that will ultimately cause a significant increase in the U.S. trade deficit, particular crude oil imports. Beyond that, I expect India will increase its global share of exported services (based on India’s internal export projections). I have little reason to believe that U.S. dependence on exports from China and other foreign sources will decline for certain classes of goods. The U.S. demand for durable and non-durable goods is projected to increase; BLS is projecting 4.6% growth in durable goods demand, and 4.9% growth for other than automotive sales. U.S. exports will grow, but not enough to offset the growth in imports. The bottom line is the trade deficit will grow.
I also do not believe that the U.S. will capture very much of the green industry production going forward. That has been a nice little sound bite during the past year, but there is sufficient evidence now to realize that much of the forthcoming green industry production will be foreign sourced. Some of that evidence involves the awarding of Federal Government contracts. Imagine that…
Granted, I can’t prove that anything that I have stated will unfold, but it is what I expect. I have little confidence in existing U.S. trade policy, fiscal policy, and, to a lesser extent, monetary policy. We appear to be on a collision course.
In conclusion, I hope that the BLS EPP report is reasonably correct. Otherwise, we may be in big trouble.
I think most intelligent people know not to trust the numbers coming out of Washington. And I think this bodes poorly for our currency, because the U.S. dollar is in a lot of trouble in the long run because the Fed is now caught in a position where it cannot withdraw the stimulus or stop the money printing without severely damaging the economy. So one of the few ways for people to protect themselves from this fiat currency debasement in my view is to keep adding to their gold investments. Last weekend I came across an article titled “Canadian Gold Stocks Rally as Gold Price Opens 2010 Higher” at http://www.goldalert.com/ which discusses the outlook for a bunch of gold-related sectors, including several gold mining companies based in Canada that have benefited and should continue to benefit from gold because of the growing deficits.
I think most intelligent people know not to trust the numbers coming out of Washington. And I think this bodes poorly for our currency, because the U.S. dollar is in a lot of trouble in the long run because the Fed is now caught in a position where it cannot withdraw the stimulus or stop the money printing without severely damaging the economy. So one of the few ways for people to protect themselves from this fiat currency debasement in my view is to keep adding to their gold investments. Last weekend I came across an article titled “Canadian Gold Stocks Rally as Gold Price Opens 2010 Higher” at http://www.goldalert.com/ which discusses the outlook for a bunch of gold-related sectors, including several gold mining companies based in Canada that have benefited and should continue to benefit from gold because of the growing deficits.
MG,
The Macroeconomic Adviser model is a structural model, so it may not be the best type of model for forecasting. For example, they identify over 200 “exogenous” variables. And they say this 30 years after Christopher Sims wrote his famous paper that gave us VARs. Don’t get me wrong, I’m not knocking the MA macro model, I’m only pointing out that it is a structural model and for the most part structural models are not particularly well suited for forecasting. They are very useful as research models, but not so hot as forecasting tools.