Global Trade Remains Strong Even After Stimulus Ends
December 15, 2009
by
Mr. Market (global asset markets) has been true to the manic-depressive characterization Benjamin Graham put forth six decades ago. He appears to be lurching between two opposing views. The first is that upon us is a recovery that will drive growth and consumption, leading to runaway inflation and dramatically higher interest rates. “Quick, sell the U.S. dollar. Increase your commodities exposure!” he warns. On other days the opposing view is in vogue, “Deleveraging will continue for years bringing below-trend growth and deflation.”
Many economic indicators in the U.S. and around the world have been steadily improving throughout the second half of 2009 supporting the first, more bullish view. Critics rightly contend, though, that we really don’t know the true health of the economy because of government stimulus which is both artificial and temporary. Thus, we don’t yet know which of Mr. Market’s views are correct.
A look at global trade through the lens of automobiles reveals that we may be headed for somewhere in between. Trade has held up rather well after the expiration of stimulus. As I pointed out in last month’s article, the healthiest outcome for all of us is a return to trade growth without global imbalances worsening. Trade data is pointing to a recovery that is mild by most standards but that brings with it some much needed correction of these imbalances.
U.S. trade is rebounding but deficit is muted. The U.S. trade in goods (both exports and imports) rose for the fifth time in six months in October. In general, increased trade activity is good as it reflects an increase in economic activity. Stores are restocking their shelves, customers are buying, and companies are preparing for a 2010 that is better than the year we are about to leave behind. For the U.S. in particular, though, the trade deficit is a key measure of health.
That deficit which the U.S. runs with most countries has widened since bottoming in May. Relative to a year ago it is down dramatically. Last October was a pretty crazy time (Lehman, TARP, oil prices, etc.) and maybe comparisons with twelve months ago aren’t so appropriate. Let’s go back two years.
One benefit of comparing to 24 months ago is oil prices (a major driver of the U.S. trade deficit) were similar in October ’07 to October ’09, near $80/barrel in both cases. In October ’07 the total trade deficit (goods and services) stood at $57 billion versus $33 billion today. That is a deficit drop of 42% while total U.S. trade (imports plus exports) has declined 11%. In the past two months U.S. total trade has been above the $300 billion per month level, very close to early 2007 levels. Yet the deficit is far off the 2007 pace – a good thing for the U.S. and the world.
Japanese trade has improved, thanks in part to autos. Japan was one of the countries hardest hit by the global recession. Thanks to its leverage to the automobile market Japanese export sector’s dropped more than 50% in just a half year. This makes it a great place to see if there was in fact a post-cash-for-clunkers hangover. This government stimulus program in the U.S. that incentivized new car purchases ended in late August ‘09. Yet Japanese exports have increased sequentially in September and October.
A closer look at Japanese automobile exports shows a recovery that has so far been sustained. Export levels are indeed down from last year but are up nearly 90% from the weakest months and stronger in the last two months than the cash-for-clunkers period of July and August.
German trade appears to finally be on an upward trend. Detailed figures for German auto exports are hard to come by but the view of overall trade finally appears to be turning positive. The trade surplus remains below that of years past but, with a bottom having been put in on exports and imports, a steady recovery may have taken hold.
Canada returns to a trade surplus. Canada is the largest trading partner with the U.S. and provides the most energy products to its neighbor to the south. In October, Canada’s exports slightly outpaced its imports. In hindsight, it seems that the trade surplus Canada became accustomed to in the past decade is linked to global energy prices. With crude oil priced in a range from $50/barrel to $80/barrel the surplus may be marginal.
This may not prove to be much of a problem. With government spending generally under control, immigration fueling population growth, and reserves of oil sands and natural gas increasing, Canada has prospects for economic growth without the need for a trade surplus. In the end, trade surpluses bring two things: strength to your own currency and/or an accumulation of U.S. dollars. Canada is clearly happier without the former and probably doesn’t need the latter.
Canadian auto related exports continue to grow. Canada is also a key partner in the supply chain for the U.S. automotive market. The strength of exports related to the automotive market is a good sign that the end of fiscal stimulus won’t necessarily result in a collapse to the days of early 2009. It also shows that the strong currency that the Canadian government so much frets is not holding this sector back.
So what does this all mean? First, there is a lesson in that the end of a particularly successful stimulus program does not necessarily mean doom and gloom. Maybe we should be less concerned about letting others expire.
So does that mean growth and inflation are right around the corner? Unlikely. Whether it is consumer products from China, automobiles from Japan, or prices of Canadian oil, we are still off from or barely at 2007 levels with meager growth rates. The trade data supports an improving picture from 12 months ago but still it is a slow grind as markets recover from excesses and imbalances of the past. As is often the case, the truth lies somewhere in the middle.
Disclosure: No Positions
