3 Key Drivers of U.S. Trade

Jeremy Glaser: For Morningstar I'm Jeremy Glaser. This week we got March's trade data, and though this may not generate the headlines of the jobs report, it's still an important metric to look at. I'm here with Bob Johnson, our director of economic analysis, for his take.

Bob thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with the data that we got for March, and then we can look at why this is so important. What did the report show? What does trade in the United States look like right now?

Johnson: Right now we are running a deficit of about $40 billion per month in terms of our trade deficit. And we have a deficit in goods which is larger than that, and then because we sell movies and software overseas, we have a big surplus in the services category. So it offsets some of that, but the $40 billion a month was also paradoxically the average for the whole first quarter and for all of 2013, as well. So we've been very stable at that $40 billion deficit.

Glaser: What did that look like compared with expectations or what the government thought the quarter would look like?

Johnson: Compared with what most of us were thinking and the trend lines, you could lay down the ruler or you could use the usual economics technique, and you get pretty darn close to the $40 billion that we actually got. So no surprise there. But trade data is accumulated from a lot of paper files out in the various customs halls throughout the United States, and it takes a while to roll that data back in. So the government has to estimate the March data that we got this week for the gross domestic product report which came several weeks ago.

Unfortunately, the bad news is the government tells us what their estimate was, and they blew it. They thought the trade deficit would be smaller. Now if we just took the trade deficit in isolation, which you probably really shouldn’t do, but it would now imply that the first quarter GDP growth might have actually been negative. We might have actually shrunk a little bit in the first quarter, but I think that’s statistical mirage. But indeed that’s what the data say right now.

Glaser: If there is a possibility that GDP was negative in the quarter, is that something to be at all concerned about, or is it really just a statistical noise.

Johnson: Well, as much as I used to love GDP and think it's a broad measure of the economy and adjusts for inflation, it does a lot of things statistically that we can't do with a lot of the other reports and really gives a nice big picture.

On the other hand it's been moved so much lately by export data that it really doesn’t seem to have any connection to reality. We had a great contribution to GDP in the third quarter from exports, and now we are going to have a big negative number. And you look at the production numbers, and things didn’t change that much. It's kind of like it goes all over the place, but in the end it comes out of the wash as kind of not having much of an impact on the real-world economics and consumption data that really drive the economy.

<TRANSCRIPT>

Glaser: Let's take a step back then. Why is this export data important, and has its importance changed in relative sense over the last couple of decades?

Johnson: Exports in the 1960s were as low as 5% of GDP. So it really didn’t make a big difference. Now we have approached the 13% to 14% level and have been there for the last three or four years in terms of exports as a percentage of GDP. And now it's a big enough number to make a difference, and it's a volatile number, as well. We talked a couple of weeks ago about housing being 3% of GDP, while here we are talking exports are 14% of GDP. So it’s not an insignificant deal.

Glaser: How does this compare with the rest of the world; 13%, 14%, is that a lot compared with say Europe or elsewhere?

Johnson: I have to look awfully hard at the table to find a country where it's smaller than our number that we have in the United States. Germany is as high as 52% [of GDP]; China is 27%. Even a country like France, you might not think of being a big exporter, it's 27% of their economy. If you looked at a broad section of countries, that you might think were global developed countries, the [export as a percentage of GDP] numbers are all kind of high 20s, low 30s, and we're kind of back at 14%. We're a little bit more self-sufficient than most countries, and we see a little bit less effect when trade things go amuck than the rest of world. But it's still more important, and we're more interconnected than we ever used to be.

Glaser: But is that one reason why maybe the United States markets don't react quite as much to turmoil overseas or things that are happening in other markets?

Johnson: Exactly. It changes how markets react. European markets are more hit by the Ukraine situation. It's why you might see European leaders kind of say, "Let's be a little careful with sanctions," because exports are definitely a big part of their economies. To us, it might affect a few individual companies, but it's certainly not as broad a swath of the economy as say most European countries may be.

Glaser: Speaking of the international trade partners. Who is the most important here? We talk about China a lot; we think about China a lot. Is that really the right partner to be focused on?

Johnson: No, not at all. I think China is important on our import front. But on the export front Europe and other North American countries are probably our biggest markets; Canada, Mexico, and Europe are our biggest export partners by far. China is roughly half of all those other markets, and a tiny percentage of our GDP is actually to China. It's more than it used to be; it used to be under 1%. Now it's somewhat under 2%, but it's still not a big market for us.

Glaser: How about categories? What goods are we sending overseas that you think of manufacturing as being kind of somewhat in decline? Are we still making shoes here? What's happening?

Johnson: I think that's a good question. I think we have a couple of really interesting categories, and the good news is some of them aren't terribly economically sensitive, especially in the short run. Certainly, you've heard about the oil and gas boom that we're having here, and again we can't directly export oil. But refined products like gasoline, plastics, and things that are made out of that oil, some natural gas, all of those things can be exported and are probably one of our biggest export categories, when you roll all the energy-related stuff together.

Boeing is certainly another factor. We think manufacturing is dead. Yes, [we are not exporting] shoes and so forth. But aircraft, we're going gangbusters, and Boeing has a 10-year backlog, almost all of it to overseas carriers. And so that's certainly a big number. 

Then food is relatively important. Soybeans in particular is one of our biggest exports.

Those are a couple of key categories. Soybeans you don't worry about; there is always demand for food. Airplanes are on a 10-year backlog, and for oil and gas the supply situation is coming our way. So those are all things that are important to our import/export data.

Glaser: Bob, thanks for your take on this data today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser.