A closer look at the trade deficit

There’s nothing like a good old-fashioned recession to bring the US trade deficit back down to more reasonable levels. Don’t get me wrong, there isn’t much good about a recession and the consequences that have sprung out of the global slump have been economically devastating on many.

Besides, there really isn’t anything old fashioned about this contraction either. Most recessions are inventory corrections, i.e., companies slash production as a result over too much stuff in their warehouses and ramp production back up when goods on hand return to reasonable levels. This one, however, has been brought on by massive and painful deleveraging in the economy.

But for now, let’s look at one silver lining – the big drop in the US trade gap.

The bite from oil imports has lessened dramatically and is the single largest reason why imports have fallen. In the first three months of 2009, our bill for crude fell to$37.4 billion, down from $85.1 billion, according to the US Census Bureau.

But that’s now at all. Falling demand in the US has translated into fewer imports across the board. It should be no surprise to anyone who has been looking at the financial news that auto imports are down. In fact, imports are down 50% to $32.0 billion in the first three months of the year versus the same period in 2008. And consumer and capital goods have also fallen significantly.

In the meantime, the global recession dented sales of goods overseas, pushing down exports of aircraft, autos, telecom equipment, and industrial supplies and materials.

It may come as a surprise to many that the US sends cars overseas, but the Census Bureau reported that autos, including parts and engines, are down about 40% to $17.3 billion in the first three months of 2009.

Exports do appear to be stabilizing, suggesting that the global contraction may be starting to abate. And China has shown signs of life over the past couple of months. A rise in demand would assist US exports, but oil prices have come well off the lows and are flirting with $60 per barrel. Thus, the best news on the trade gap may be behind us.