August 09, 2013
One of my frequent complaints here at BTP is the tendency of the media to ignore the trade deficit. As an accounting identity, the trade deficit must be equal to the sum of the budget deficit and the deficit in private saving. This means that if we have a large trade deficit, then we must have either a large budget deficit and/or a large deficit in private savings.
For whatever reason people don’t like budget deficits. We get large deficits in private savings when we have wonderful developments like housing bubbles depressing household savings (i.e. spurring consumption) and fostering construction booms. Those who don’t like crashes, don’t like bubbles. In other words, there are good reasons to be concerned about the trade deficit because a large one implies economic developments that many consider bad.
Therefore I was happy to see that Morning Edition had a segment highlighting the reported drop in the June trade deficit with the usually astute Ryan Avent. Unfortunately, the segment may have misled listeners on the meaning of the data.
The highlight was a sharp drop in the size of the reported deficit, which fell from $44.1 billion in May to $34.2 billion in June, a decline of almost $10 billion. While this is good news, it is not uncommon to see large one-month jumps in the deficit. Most often they are reversed in subsequent months’ data. For example, the reported trade deficit fell from $51.4 billion in January to $43.8 billion in February. It rose to $47.8 billion in March. It fell from $46.3 billion in November of 2012 to $36.3 billion in December. It then rose to $42.7 billion in January.
This erratic pattern in monthly data should have been noted. In fact, the reported deficit had risen by $4.0 billion in May, so much of the reported June decline was simply a reversal of large jump in May.
The piece went on to place the trade numbers in a context of other good news, including low unemployment insurance claims and a positive reading on the Institute for Supply Management’s service index. These reports are good news, but again need context.
Unemployment insurance claims had been trending downward all year, even as job growth has remained weak. One possible explanation is that many of the people who are now getting laid off don’t have enough work experience to qualify for benefits. People who have been intermittently employed in low wage and part-time jobs over the last two years will often not qualify for benefits. With a prolonged period of economic weakness like what we have seen since 2008, many workers (especially those prone to be laid off) will be in this situation.
Among the releases that give a less positive picture is the Bureau of Labor Statistics Job Openings and Labor Turnover Survey. The June report did show a modest uptick in job openings, but not in the manufacturing sector that was highlighted in the Morning Edition discussion. Openings in manufacturing have been trending down all year and are now 30 percent below their year ago level.
The other item that is worth mentioning in this context is the July employment report released last week. This is much more recent data on the state of manufacturing than June trade numbers. (Remember the trade data reports when goods enter or leave the country. The latter can be several months after they left factory.) The July employment report showed manufacturing adding a modest 8,000 jobs after being flat the prior month. Perhaps more importantly, it showed a decline in the length of the average workweek and the amount of weekly overtime of 0.2 hours, implying a substantial drop in the demand for labor. In other words, anyone looking for evidence of rising employment in manufacturing will not find it in the July employment report.
In short, it’s good to see some attention paid to the trade deficit. It would have been useful if the data were placed in a larger context.
Note: Typos corrected 3:30, thanks to Robert Salzberg.
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