February 13, 2004

Trade Deficit Within Kissing Distance of Half a Trillion

Chart below courtesy of briefing.com showing the trade deficit in nominal terms on a monthly basis. The December trade deficit came in at just under half a trillion dollars, $489.4 to be exact. It was up 17% in 2003. The supposedly good news from the numbers is that import prices were up 1.3%. This is a sign that the falling dollar is beginning to make foreign goods more expensive in the U.S. That's fine as theory. But in reality the biggest increases in import prices are in energy, namely a 6.2% increase in oil prices. We've yet to see inflation, or at least noticeably rising prices in finished consumer goods. In other words, I don't think this is the kind of inflation that will force the Fed to raise interest rates before November. Exports, for their part, actually declined--which is not exactly what you want to happen with a depreciating currency. You want it to make your exporters more competitive. Such is the problem with deficits, however. Rather than taking surplus dollars to buy American goods and services, foreigners are using them to buy U.S. government bonds. This has the short-term effect of keeping the dollar from falling even further. But it has the long-term effect of hurting exporters. It's not exactly an ideal situation...a rising deficit, falling exports, and a falling dollar. And quixotically but as I've explained elsewhere, also this macro economic nervousness is bond bullish. Welcome to bizzaro land.


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