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The Critical Balancing Act of Trade

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. The July balance of trade numbers, which came out on Thursday, showed a nice contraction in the trade deficit from June. This number actually has quite a big impact on the U.S. economy, on GDP specifically.

Here with me to talk about the numbers, the implications, and the trends that we've been seeing in balance of trade is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: First question for you. We did see a contraction in the deficit between June and July, but we still had $42.8 billion trade deficit, meaning that we imported that much more than we exported. Sounds like a big number. But can you put that in the context? Where is that number in the trend that we've been seeing?

Johnson: Over the long run, in the depth of the recession, and when you are in the middle of a recession, that tends to shrink deficit because nobody is buying anything, and maybe we were in the mid-$20 billions for one month. And maybe when things were really booming and commodities were way high in the 2007-08 timeframe, we may as gotten as high as over $60 billion in the given month.

So now kind of back at $42 billion, we're kind of between the two extremes. And it looked like for a while the June number was so bad that it looked like maybe we were headed back to that $60 billion, and now it looks like we've backed off of that number, and we're kind of more back in the middle again.

Stipp: So one of the things that really helps the deficit to shrink in July was the airplane exports. So, it seems that potentially what we're sending out to other countries are bigger ticket items, but what are the major trends that you're seeing in what we're sending out versus what we're bringing in?

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Johnson: I think civilian aviation is certainly one of the biggest ones. The Boeing jetliners, the parts for jetliners, the service for jetliners are all big positives and an important part of our exports. Computer equipment is obviously a big import and a big export, and telecom equipment kind of the same. We take a lot of stuff in and we also send a lot of stuff out--and those are the really big export categories.

And on the import side, oil was obviously a huge number in overall scheme of things. We import a huge amount of consumer goods, and it's one of the less balanced categories. We export a lot of capital goods; we import a lot of capital goods. We import some food; we export some food. But the one that's really out of whack is consumer goods, and we are way out of whack on that one.

Stipp: So, generally the market I think seems to think that it's a good thing when we see that deficit shrinking. But what are the actual economic implications of seeing a deficit widen and why wouldn't we want to see it widen at a greater extent? It seems like foreign goods for us, as consumers, are cheaper but what is the overall economic impact here?

Johnson: Yeah, I think you got to be real careful about it. But overall trade is, in my opinion, a good thing. And the general economic theory is that everybody makes the thing that they are good at and they can make it more cheaply, and we don't all reinvent the wheel by each having our own industry in one thing when somebody has really got the expertise in it. So, we like to see a lot of trade. We don't like to see big imbalance, and the U.S. has tended to do run a fairly big imbalance.

Stipp: One of the things I think that some folks would think about trade is that, the jobs here in the U.S and how much we are exporting and how that affects the job market, which obviously we're still sort of stuck in the mud there. What are the implications for the balance of trade in your mind from what the job situation is right now?

Johnson: I think you got to be real careful when you look at the numbers there. A lot of us get very upset about how big the imports are and the effect it's had on a few statistics. But on the other hand, trade has been a really good thing. I mean, if it hadn't been for trade, this recession would have been heck of a lot worse than it already was.

One of the first thing to get better this recovery was exports, and it was one of the things that really led us out. And it's kind of, live by the sword, die by the sword; the last quarter largely and very negatively impacted by a large import number. In fact, GDP would have grown in the second quarter, which was reported at something like 2.4%, that number could have been over 5% if it hadn't been for a large jump in imports, which partially reversed itself this month.

Stipp: So if we are seeing some more exports, could that mean that some areas of the job market here in the U.S. might improve if that trend continues?

Johnson: Yes, and we've already seen a little bit of that in yesterday's beige book. The analysis of the book was, "gee, things are kind of better in the Midwest and maybe even in the West and not so good maybe in the East." And it's the farm equipment manufacturers, the people making big excavators, the people making capital goods here in the central part of the United States, and some computer equipment on the West Coast that's getting shipped out that's really brought some new jobs, and some of the East Coast markets who have less exposure that are doing less well.

Stipp: So generally then if we like to see a better balance, if it's good to have some exports and have a healthy export market in the U.S., what are the factors that can help to bring us back in the balance because we are still--even though we saw improvement in July--we are still working at a deficit? I know there are a lot of issues wrapped up into this. But in your mind, what are some of the major things that could help bring us closer to an equal trade there?

Johnson: I think one of the key things that happens is that the U.S. tends to be a consumption-oriented economy, and we spend a very high percentage of our money on consumer goods--upwards of 70%. And in some places like China, it's more reversed. It's more like the 30% is on the consumption side--I'm a little off on that number. But it's that imbalance and what we need is for the U.S. to kind of save a little bit more and be more balanced about what we do with our GDP, i.e., more savings, more investment, and little less on consumption.

And the opposite in China, that they actually [could be] a little bit more free flowing and buy more things including goods that maybe imported [goods] from the United States. So they need to kind of decrease their savings rate, and we need to increase ours. And we've actually done a pretty good job of increasing ours so far. We're gone from a 1% savings rate to a 6% or 7% savings rate. So we've done a pretty good job of adjusting so far. It's been painful, exceptionally painful. But that's what it takes to bring it back in balance.

Stipp: I know a lot of folks point to the currency issues and the Chinese currency, which is said that it's been artificially low and so what makes their goods seem cheaper here in the U.S. To what extent does the currency effect have on the overall balance of trade in your mind?

Johnson: I think a lot of folks have made a big deal about it and made a big focus issue of it. But I honestly don't think if the currency in China was 10% higher or lower it would make a lot of difference. I mean, you aren't going to pull a lot of those consumer goods that are now manufactured overseas, for that little bit of change, you're not going to say, "Oh, let's make those in the United States." It may never make sense to make those in the United States. So I don't think currency is actually going to be our cure.

Stipp: Okay. Bob thanks so much for your insights on the balance of trade and the impact on the economy.

Johnson: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.