Quick Comment: Trade

Today’s report tells us that the US trade balance worsened 5.9% in December to $40.6 billion, which ends a period of improvement and could potentially slow down overall growth early next year. The biggest shift came in oil, where imports and price increases drove the imbalance to its highest since October 2008. Overall for the entire year 2010 the trade deficit totaled $497.8 billion which is an increase of 32.8%. Exports rose well, by 16.6%; but imports also rose strongly, by 19.7%.

A great deal of focus has been on prices of commodities and raw materials, but we should all recall that the portion of finished goods prices that these things represent is actually quite small. Labor costs are much more significant. So, even though rising oil prices will act to increase the deficit it isn’t clear that those increases will translate into a sudden surge in inflation. There just isn’t any sign of such a surge in the one component capable of driving inflation quickly higher: wages. This is for obvious reasons, while unemployment remains as high as it is.

Meanwhile the trade gap widening will act as a drag on GDP. Don’t forget that trade added a major portion of the fourth quarter’s overall growth, so a wider than forecast gap in December may imply a lower GDP number when the next revision is announced.

Lastly: as US growth continues to maintain its current pace retailers and manufacturers will be impelled to restock supplies and inventories at higher levels. This suggests that imports will continue to outpace exports in the near term. In turn this tells us that trade will continue to dampen GDP growth throughout the next phase of the recovery.