Trade Deficit Merits Closer Look, Economists Say
Once again, jittery financial markets are mesmerized by the Commerce Department’s impending monthly announcement of the nation’s estimated trade deficit with the rest of the world--a statistic widely derided as inaccurate, volatile and statistically meaningless, but which has nevertheless taken on almost mythic importance.
Market consensus has fixed on a predicted deficit of about $13.5 billion for December’s trade balance as the midpoint of a set of forecasts that range from an improbable low of $9 billion to a high of about $16 billion. But all that means is that the actual number, to be announced this morning, is anybody’s guess.
And there is an increasing consensus among economists that the deficit number, which the Commerce Department does not adjust to seasonal factors and therefore is subject to wide month-to-month fluctuation, really should not be taken very seriously.
Indeed, some economists would prefer to discount it even if it were a completely accurate reflection of America’s trade in goods with the rest of the world.
“I do wish the markets would start looking less at these trade figures,” said Allen Sinai, chief economist at Shearson Lehman Hutton’s Boston Co. subsidiary. “It’s one of the least reliable figures around, and in terms of impact on the real economy, it’s increasingly meaningless.”
One reason for this is that in recent years the persistently expanding trade deficit has given rise to an assumption, now widespread, that most of what was bought has merely been consumed--whether in French wine, Italian shoes, Japanese videocassette recorders or West German cars.
The conventional wisdom, expressed not long ago by Sen. Daniel Patrick Moynihan (D-N.Y.), is that in the 1980s, the Japanese loaned Americans $1 trillion so they could spend it all on a five-year party.
But a closer look at the trade figures of the past few years shows a different reality. In 1985, for example, when the merchandise trade deficit in the Commerce Department’s relatively accurate current account tabulation soared to $124.4 billion, consumer goods and foreign passenger cars accounted for nearly 39% of all goods imported from abroad, while imports of goods used by U.S. industry--capital goods and manufacturing materials--comprised barely 36% of all imports. (The balance consisted of various services such as tourism.)
But in 1986, the numbers began to shift. That year, when the trade deficit jumped to $144.3 billion, foreign cars and consumer goods accounted for 33% of the imports. But industrial materials and manufacturing machinery and equipment jumped to more than 38%.
That trend continued last year, and by November, the last month for which any numbers were available before today, imports of capital equipment and industrial supplies made up about 39% of all imports.
“What we are seeing is something that has never occurred in the past,” explained Jerry Jordan, chief economist at First Interstate Bank in Los Angeles. “Along with the capital inflow from Japanese and other foreign investors, we are getting imports of their own supplies for the factories they are building here. That’s the healthiest kind of import.”
Added Sara Johnson, of Data Resources, Inc., a Lexington, Mass., economic forecasting firm: “As the foreigners move production to the U.S. to capitalize on the cheap dollar and bring in capital to set up plants, they begin by importing supplies from abroad. Eventually, the weaker dollar will also make it more attractive to start buying or manufacturing components here in the United States.”
Thus, Johnson predicted, the long decline in exports of American manufactured goods that saw a trade surplus in capital equipment--industrial machinery, electronics, electrical machinery, machine tools and the like--dwindle to barely $4.2 billion in 1986 from nearly $45 billion in 1981 will almost certainly turn around, and do so rapidly. “We expect the surplus to return to peak levels by 1990,” she said.
Indeed, American exports of industrial supplies and capital goods moved to 58% in 1986 from 56% of all exports in 1985. By last November, U.S. industry’s exports of materials and machines used in manufacturing was nearly two-thirds of all exports.
Perhaps inevitably, the process suggests a cyclical movement which, if trade is not stifled by serious recessions here or abroad--or, worse, by protectionism--swings back and forth in a widening arc as national economies oscillate between production and consumption.
“There is an irony here,” noted Donald Straszheim of Merrill Lynch in New York. “We’re the biggest market for a lot of other countries’ products, so they have been importing lots of our capital goods to make the stuff they want to export to us. Then, as trade turns around and our industries start exporting more, we do the same thing and buy their capital goods.”
In consequence, as the economies of advanced industrial economies become increasingly intertwined, the true measure of the value of international trade inevitably becomes more complicated than simply counting the worth of goods that are shipped across an ocean or a national border.
Suppose that a U.S. machining firm buys a Swedish robot assembly which, running made-in-USA software, turns out metal fabrication equipment that is sold to Japan to manufacture parts for a Honda that is assembled in Ohio and sold in South Korea. Who benefits? Where is the trade deficit?
“You can see short-term adverse effects here,” conceded Kenneth Flamm, a specialist in industrial economics at the Brookings Institution. “Most robot equipment is Japanese, Swedish or German. But it’s still better to get that stuff overseas than not get it at all since in the longer run it helps our industries become more competitive.”
Flamm explained: “If you look to a longer horizon, our standard of living depends on improving our productivity here. If you upgrade our manufacturing processes and the skill level of our labor force, then you upgrade our standard of living. So it’s clearly a good thing if we start to reduce imports of consumption goods and increase imports of capital goods, which go to upgrade our industrial plant.”
Perhaps even the markets will begin to catch on, suggests First Interstate’s Jordan. “I think the markets are going to begin to focus more on the composition of the trade numbers than on just the size of the deficit, month after month,” he said on the eve of the December report.
“We could end up with the same number as November or slightly worse or slightly better. But if that number is associated with a slowdown in consumer imports, even a higher number probably won’t hurt the markets. I think they really want to see consumption imports slow down.”
