An article today titled ‘Vital Signs: Trade Gap Is Expected to Widen Again’ says that “In the coming year, U. S. exports are sure to pick up, as global demand recovers, but so will U.S. imports, as U.S. demand stabilizes and returns to at least modest growth”, and “Many economists are starting to upgrade their forecasts for global growth in the second half, with particular attention to Asia”.  If you want to read a positive article on world economic recovery this is it.  The article discusses the recent narrowing of the U.S. trade deficit with particular focus on the reduction in credit financing which is referenced in the statement “The major impact on U.S. trade over the past year has been the shrinkage in volume of world trade as a result of the global recession. In particular, the credit crunch has exerted a special downdraft by creating a shortage of trade finance. The Organization for Economic Cooperation and Development estimates the lack of finance has accounted for about a third of the shrinkage in global trade”.  As I read the article the implication seems to be that ‘increasing U.S. trade deficits are good because that will surely mean economic recovery is occurring’.  The article deals in % declines in the U.S. trade deficit, not absolute numbers.  The cumulative U.S. net trade deficit (that is, the net of product deficits and service surpluses) was:

•    effectively $0 when President Nixon took the U.S. off the gold standard in 1971;

•    by the end of 1979 was approximately $80 billion;

•    by the end of 1989 was approximately $920 billion;

•    by the end of 1999 was approximately $2 trillion;

•    by the end of 2008 was approximately $7 trillion (note the enormous escalation of the U.S. cumulative trade deficit in the 9 year period just ended); and,

•    in 2009 will increase by about a further $350 billion if the monthly trade deficits experienced in the first 4 months of this year continue at the same levels for the balance of 2009 (currently the U.S. trade deficit is running at just under $30 billion per month).

Through October, 2008 the monthly U.S. net trade deficit was running at around $60 billion per month.  As best I know the approximate 50% drop since then largely has resulted from the much lower oil prices that exist today versus mid-2008, and reduced U.S. consumer spending on imported goods that have now worked there way through the import/export U.S. inventory system – offset by reduced U.S. exports of goods resulting from the global recession.

I consider these cumulative and continuing trade deficits highly troublesome and problematic.  In my view an important key to a country’s long-term economic stability and success has to be both running balanced fiscal budgets and running balanced trade positions.  I don’t see the U.S. doing either in the foreseeable future, if ever due in large part to the loss of its manufacturing jobs and base over (in particular) the past 10 years.  Hence I have a bleak view of the future of the near and long-term prospects for the U.S. economy.  I am not an economist and hope for the sake of both my and your children and grandchildren that I am missing something and that my conclusions either seriously in error – or better yet, plain wrong.  Please comment on this blog post if you see a ‘light at the end of the tunnel’ that I am missing.

Among other statistics, reports on the ISM non-manufacturing index, consumer credit, wholesale trade, international trade, import prices and consumer sentiment will be released next week – and I will be commenting on some of these in this blog as they come out.