U.S. Trade Deficit, Defying Predictions, Grows as Dollar Slides
U.S. Trade Deficit, Defying Predictions, Grows as Dollar Slides
May 31 (Bloomberg) -- When the U.S. dollar began sliding on foreign exchange markets three years ago, Bank of America economists Mickey Levy and Peter Kretzmer figured an improvement in the burgeoning U.S. trade deficit couldn't be far behind.
Their conclusion today: Yes, it could.
``It's certainly defied expectations,'' says Kretzmer, who thought the deficit would start to narrow within 18 months after the dollar started its slide. Instead, the monthly trade gap has mushroomed by two-thirds, to $55 billion in March from $33 billion in early 2002, even as the dollar declined 26 percent against a basket of currencies.
Levy and Kretzmer now forecast the 2005 trade deficit will rise to $667 billion instead of the $585 billion they expected in January. The New York-based economists say the gap, currently 6 percent of the gross domestic product, will keep widening through much of 2006. A wider deficit slows growth and raises the risk foreign investors and central banks may start to avoid U.S. securities, says Edward McKelvey, chief U.S. economist at Goldman Sachs & Co. in New York. That in turn may push the dollar down more sharply.
The persistence of the trade deficit has come as a surprise to many economists, says Gabriel de Kock, an international economist at Citigroup Global Markets in New York; a decline in the value of the dollar is supposed to make imports more expensive at home and exports more competitive abroad.
``Standard rules of thumb would say the trade balance should have declined by 1 percent of GDP,'' de Kock says. ``That has not happened.''
Weakened Demand
The main reason the U.S. trade gap is less sensitive to currency swings than before is that Europe and Japan have been growing so slowly that demand is weak for cheaper U.S. exports, says Catherine L. Mann of the Institute for International Economics, a non-partisan research group in Washington.
The U.S. economy grew 4.4 percent last year and may expand in 2005 by 3.4 percent, the median of 64 forecasts in a Bloomberg News survey. By contrast, the economies of the 12 nations using the euro expanded 1.8 percent in 2004 and may grow just 1.2 percent this year, according to the Paris-based Organization for Economic Cooperation and Development. Japan grew by 2.6 percent in 2004 and is expected to expand by 1.5 percent this year.
Consequently, while Americans are buying imports in record volumes, U.S. exports haven't kept pace. The $60 billion rise in the U.S. trade deficit last year shaved 0.6 percentage point from overall economic growth, meaning the economy would have grown by 5 percent, rather than 4.4 percent, had the deficit not increased, Goldman Sachs estimates.
Lucrative Exports
``Just because the price is right doesn't mean exports will take off,'' says Mann. Growth abroad has to be stronger as well, so companies overseas will invest in capital goods that are the U.S.'s most lucrative exports, she says. She and other economists estimate U.S. exports would have to grow twice as fast as imports to keep the deficit from rising; for the 12 months ended in March, exports grew 7.4 percent while imports rose 9.8 percent.
Brookings, South Dakota-based Daktronics Inc., which makes electronic scoreboards and display panels for export to customers in 70 countries from Canada to Europe and the Middle East, is one of the companies that has found the dollar's decline to be little help in improving competitiveness.
``When the dollar started declining, our expectations were that it would be helping us more than it has,'' Chief Financial Officer Bill Retterath says. ``We're disappointed that we haven't been able to get a bigger benefit from it.''
Also mitigating the effect of the dollar's slide on trade are heightened global competition, an increase in the number of U.S. manufacturing firms that have set up plants abroad, and the fact that the dollar's slide so far hasn't been as steep as in previous declines. Fed Chairman Alan Greenspan, in a Feb. 4 speech, said manufacturers in Europe and Japan would rather absorb some of the impact of their currencies' rise than boost U.S. prices and risk losing market share.
Global Markets
Multinationals such as Fairfield, Connecticut-based General Electric Co., the world's largest company by market value, and Pittsburgh-based Alcoa Inc., the world's biggest aluminum maker, have manufacturing facilities overseas. That means sales from those plants don't count as U.S. exports.
Marlow Industries Inc., a Dallas-based maker of thermoelectric coolers for medical and aerospace industries, is following suit. It has contracted some manufacturing to a facility in China and plans to set up its own plants there and in Vietnam, President Barry Nickerson says. ``We expect pretty significant growth in the next five years,'' he says.
This year, exporters have already lost some of the edge they might have gained from a lower dollar. The U.S. currency has risen by 6 percent from its low on Dec. 30.
The Dollar's Drop
The dollar's decline since 2002 has been smaller than previous slides, and some currencies -- such as China's yuan, which is pegged to a fixed exchange rate -- haven't been affected at all. The U.S. currency's 26 percent dip since January 2002 compares to a 33 percent drop during the 39-month period that began in September 1985. The U.S. trade deficit shrank by 39 percent between 1987 and 1992.
Some exporters such as Caterpillar, Inc., the world's largest maker of earthmoving equipment, are thriving. Peoria, Illinois-based Caterpillar's exports rose by $1.6 billion, or 27 percent, in 2004. Behlen Manufacturing Co., a Columbus, Nebraska, maker of steel buildings, doubled its exports last year because the lower dollar helped it compete against its European rivals, says Tony Raimondo, chairman and chief executive.
The Commerce Department this month reported the trade deficit unexpectedly shrank in March to $55 billion following a record $60.6 billion gap in February. Mostly because of that, the department on May 26 revised its estimate of U.S. economic growth for the first quarter to a 3.5 percent annual rate, from the previously estimated 3.1 percent pace.
Seasonally Adjusting
James Glassman, senior U.S. economist at JPMorgan Chase & Co. in New York, doesn't see the March decline as a turning point; the improvement came partly because shippers in China, the source of 12 percent of U.S. imports, shut down for their New Year holiday. ``People are going to interpret this as related to that difficulty in seasonally adjusting'' the March figures, Glassman says.
Even with success stories such as Caterpillar, economists say there's little evidence the dollar will help the trade deficit, in turn aiding growth, anytime soon.
``I don't see a very meaningful turn in these numbers toward lower trade deficits,'' says Robert DiClemente, chief U.S. economist at Citigroup Global Markets in New York. ``That's going to come very slowly over time, and mostly on the back of a longer-term decline in the dollar.''
To contact the reporter on this story: Art Pine in Washington at apine@Bloomberg.net.
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