Posted on 03/15/2006 8:38:05 AM PST by Willie Green
For education and discussion only. Not for commercial use.
The Commerce Department reported on March 14, 2006 that the 2005 current account deficit was $804.9 billion, up from $668.1 billion in 2004. The current account is the broadest measure of the U.S. trade balance. In addition to trade in goods and services, it includes income received from U.S. investments abroad less payments to foreigners on their investments in the United States.
In the fourth quarter, the current account deficit was $224.9 billion, up from $185.4 billion in the third quarter. In the fourth quarter, the current account deficit exceeded 7 percent of GDP.
The current account deficit could easily top $1 trillion a year by the second half of 2006.
Separately, the Commerce Department reported today that retail sales were down 1.3 percent in February, indicating the consumer pullback is beginning.
The combination of slower growing consumer spending and a widening trade gap will dampen economic growth by mid year. Real GDP growth will likely grow about 3.8 percent in the first half and 3.3 percent in the second half.
Slower second half growth will hit Ford and GM particularly hard. Consumers will become more value conscious in vehicle selection, and this will play into the strengths of Asian, and in particular Korean, brands. Ford and GM are not well positioned with attractive, smaller and reliable vehicles in the value segments of the market. Among these company's offshore brands, Mazda is best positioned.
Anatomy of the Hemorrhaging Current Account
In 2005, the United States had a $1.6 billion surplus on income flows and a $58.0 surplus on trade in services. Together these were hardly enough to offset the massive $781.6 billion deficit on trade in goods.
In 2005, the deficit on petroleum products was $229.2 billion, up from $163.4 billion in 2004; prices for imported petroleum rose about 36 percent from 2004, while the volume of imports fell 2 percent.
The American appetite for inexpensive imported consumer goods and cars was a huge factor driving the trade deficit higher. In 2005, the deficit on nonpetroleum goods was $537.2 billion, up from $487.6 billion in 2004.
Motor vehicle parts imports increased 10 percent to $83 billion, as Ford and GM continue to push their procurement offshore and cede market share to Japanese and Korean companies offering better made and less expensive to own vehicles. Even when they assemble automobiles in the United States, Asian automakers import more parts than Ford and GM.
The Wal-Mart effect was broadly apparent. In 2005, the trade deficit with China was $201.7 billion, a new record. This was up from $162.0 billion in 2004.
This situation is likely to become worse in the months ahead. Crude oil prices are rising again, and an overvalued dollar continues to keep imported cars and consumer goods cheap. Announced production cutbacks at GM and Ford will result in more imports of motor vehicles and parts.
The dollar remains at least 40 percent overvalued against the Chinese yuan and other Asia currencies. China continues to peg against the dollar. Although China revalued the yuan from 8.28 to 8.11 in July, and announced it would adjust the currency to a basket of currencies, the yuan continues to track the dollar very closely. Currently it is trading at 8.05.
Other Asian governments conform their currency policies to China, lest they lose competitiveness in U.S. and European markets. To sustain undervalued currencies against the dollar, foreign government purchased $220.7 billion in U.S. securities. This created an 11 percent subsidy on their exports to the United States.
Consequences for Economic Growth
High and rising trade deficits tax economic growth. Specifically, each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment, and shifts workers into activities where productivity is lower.
Productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into these industries would increase GDP.
Were the trade deficit cut in half, GDP would increase by nearly $300 billion, or about $2000 for every working American. Workers' wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying good wages and offering decent benefits.
Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost 3 million jobs. Following the pattern of past economic recoveries, the manufacturing sector should have regained about 2 million of these jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.
Longer-term, persistent U.S. trade deficits are a substantial drag on growth. U.S. import-competing and export industries spend three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor.
Cutting the trade deficit in half would boost U.S. GDP growth by 25 percent a year.
These effects of lost growth are cumulative. Thanks to the record trade deficits under President Bush, the U.S. economy is about $1 trillion smaller. This comes to nearly $7000 per worker.
Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit would be about half its current size.
Were the trade deficit cut in half, $2000 would be recouped but $5000 per worker in lost growth is essentially lost forever.
The damage grows larger each month, as the Bush administration and the Congress dally and ignore the corrosive consequences of the trade deficit.
Sure are a lot of people who want to sell to us. Good News.
Oil adds $250,000 a MINUTE to the deficit. (thats $15 million an hour- -- $360 million a day- -- $10.8 billion a month- -- $129 billion a year) Eliminate the oil deficit and where do we stand?? In the GREEN, thats where!!! That is not trade, that is a crime. We have 4% of reserves but use 25%. The DemonRats block drilling. It should be referred to as the DemonRats Oil deficit, and EVERY time it is mentioned by a talking head, it should be mentioned that if we could do away with the oil deficit that the DemonRats will not let us solve, there would be no deficit.
I could not find a true statement in this entire post.
Can someone help me?
Trade deficits are good.
Curious. What is the gubmint supposed to do? Make it illegal to buy imports? Why blame consumers? It's not my fault Ford and GM are poorly positioned. And don't a lot of Asian car companies build here in the states? That means MORE jobs, not less.
>>Trade deficits are good.
I would agree if the federal budget deficit was smaller and the household savings rate was positive. The business sector of the economy has a current account surplus.
A lot of those Asian auto manufacturers are falling over themselves to build plants here. Mr. Morici gets around that by claiming they import more parts than GM and Ford (and presumably DaimlerChrysler). Only the domestic-content label truly knows.
If this comes to pass, it is over for the US economy.
There is nothing inherently wrong with a trade deficit if you import things that help you grow down the road. This is not the case as we import oil, cars, toys and trinkets.
As I pointed out in another thread, the $804.9 billion trade deficit would only be reduced by 16%, not eliminated, if we eliminated $129 billion/year of oil deficit.
Also, from this article:
In 2005, the deficit on petroleum products was $229.2 billion, up from $163.4 billion in 2004; prices for imported petroleum rose about 36 percent from 2004, while the volume of imports fell 2 percent.
Sure.
Here's a link to an online Text to Braille converter.
I thought the total was cumulative.
That was good thanks.
No. From the article (you do read them, don't you?):
The current account deficit could easily top $1 trillion a year by the second half of 2006.
If the $804.9 billion was a cumulative total for the past 30 years, those of us who are concerned could join the rest of you in your bliss.
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