For Immediate Release
Chicago, IL – August 12, 2010 – Zacks.com Analyst Blog features: General Electric (GE), Siemens (SI), Ford (F) Toyota (TM) and BP (BP ).
Here are highlights from Wednesday’s Analyst Blog:
Trade Deficit Jumps to $49.9B
In June, the nation's Trade Deficit jumped to $49.90 billion from $41.98 billion in May, and from just $27.14 billion a year ago. That is an 18.9% rise for the month and a 83.9% increase from a year ago. It is far worse than the expectations which were for the trade deficit to be more or less unchanged from May.
It also strongly suggests that when the next look at second quarter GDP comes out that it will be revised downwards. The trade deficit is a direct subtraction from GDP in the form of net exports, so any increase in it directly hits GDP growth.
The non-oil part of the trade deficit actually started to level out in mid-2004, and started to improve sharply in early 2007. That progress, though, was masked by a sharp deterioration in the oil side of the deficit, as the price of oil spiked from early 2007 through the summer of 2008. The collapse in oil prices during the freeze up of the financial markets proved to be a great cushion for the rest of the economy.
As oil prices have recovered from the mid-$30's to to the current level of near $80 a barrel, oil has once again helped contribute to the growth of the trade deficit. More worrisome, though, is that now the non-petroleum side is showing an extremely sharp deterioration again.
It appears that the strength of the dollar in recent months due to the Euro crisis is already starting to take its toll on U.S. international competitiveness. It is not just that our trade deficit with Europe is deteriorating, rising to $7.8 billion in June from $6.2 billion in May. Our companies compete directly with European companies in many third-world countries.
For example, General Electric (GE) and Siemens (SI) of Germany both make products like MRI machines. If the value of the euro falls 10% against the dollar, then Siemens can easily undercut the price it quotes to a Chinese hospital that is interested in upgrading its medical imaging department, and thus get sales that might have otherwise gone to GE. China is, of course, our largest bilateral trade deficit, and it increased to $26.2 billion from $22.3 billion in May.
What We Need: A Weaker Dollar
We need to see the dollar weaken to get the non-oil part of the trade deficit under control. That will make U.S. goods more competitive abroad, and will also make imports more expensive. As a result, domestic producers like Ford (F) would take market share from foreign firms like Toyota (TM), or as is more likely, firms like Toyota would move still more of their production to the U.S. rather than importing cars from Japan. Since oil is priced in dollars, it will tend to go up in price when the dollar gets weaker, so a weak currency will not really solve that part of the problem.
Even though the oil portion of the trade deficit has not been growing as fast as the non-oil part, it is still a very significant part of the overall picture. It seems unlikely that we will ever be able to really solve our overall trade deficit problem if we do not solve our oil addiction. As a country we are like a drug addict who is constantly selling off the family silver to feed his habit.
Unless the price of oil were to collapse to the very low levels that prevailed in the late 1990's, the oil side of the equation is going to be a constant thorn in the side of the economy. After all, 42.5% of the overall deficit is still a very significant part of the problem.
That is probably putting it far too mildly. The trade deficit is more like a cancer on the economy. It is what leads the U.S. to be indebted to the rest of the world, not the budget deficit. After all, during WWII, the U.S. ran budget deficits that were far larger as a share of GDP than what we are running today, but we financed them internally, through the selling of war bonds. We emerged from the war as by far the world's largest creditor, not in hock to the rest of the world.
Now we owe the rest of the world trillions, and our creditors are not really countries that have our best interests at heart, like China and the members of OPEC. Fortunately, the interest rate we have to pay on T-notes is very low right now, so the cost of carry is relatively low. But still, the interest that we pay that goes abroad is money that leaves the U.S. economy, rather than in the old days when it would mostly go to domestic creditors and would be spent here.
Cutting Back on Oil Use
For the most part, oil is used as a transportation fuel. Very little of it is used to generate electricity anymore. We need to find a way to cut back on the amount of oil we use for transportation. One way of doing this would be for us to move more of our goods by rail rather than by truck.
Probably the way this would be best accomplished would be for railroads to carry the goods for the long haul and then have the containers transferred to trucks for the last 50 miles of so of their journey. Not only are railroads much more fuel efficient than trucks, but this would also cut down on traffic congestion. Sitting in traffic jams wastes an enormous amount of oil each year.
Moving to more efficient cars would be a great help. However, as a nation, we suffer from Alzheimer's. We have already seemed to have forgotten the pain of high oil prices two years ago. In July, as Detroit was rebounding from a year ago, it was sales of pickup trucks and SUVs that were leading the way, while small fuel efficient cars were languishing on the lots.
Most cars on the road usually have no, or at most just one, passenger in them. How much would our standard of living really be worse if people were driving smaller cars, and cars with four cylinders instead of six or eight? As the BP (BP ) disaster in the Gulf has shown, the answer to our imported oil problem cannot really be "Drill, Baby, Drill," at least not for oil.
Even with the deep waters of the Gulf of Mexico, the U.S. has only 2.1% of the world's oil reserves. We already produce 8.5% of the world's oil from that limited reserve base, which makes the U.S the world's third largest oil producer after Russia and Saudi Arabia. The problem is that we consume 21.7% of the world's oil. Anyone who thinks that we can solve the problem by increasing our share of production to match our consumption of 21.7% of the world total on just 2.1% of the worlds reserves is just plain off their rocker.
In Summation: Bad News
This report was very bad news. I am far more concerned about the trade deficit than I am about the fiscal deficit, particularly for the short term. At least in the short term, the fiscal deficit provides stimulus that helps increase GDP growth. The trade deficit is nothing but a drag on the economy, and a very large and growing one at that.
The U.S. simply cannot continue to be the consumer of last resort for the rest of the world. If we do, it will not be long before the country is bankrupted and our living standards fall towards those of the developing world. This is a clear and present danger, but it does not seem to be getting the sort of attention it deserves.
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