The outlook remains murky because of all the twists and turns of the Sino-American trade conflict and attendant tariffs and tariff front-running. All the same, this morning’s U.S. government monthly trade report (for July) adds to the evidence that under President Trump’s administration, America’s economic fortunes are steadily being decoupled from those of hostile, protectionist, dictatorial China even as the overall trade gap is (more slowly) being brought under control.
Another development deserving special attention: To the extent that U.S. trade shortfalls are simply being diverted from China to elsewhere (a worthy goal in and of itself, given the intertwined economic, technological, and national security threat posed by Beijing), an especially big gainer has been Mexico – whose stabilization and development is so crucial to Americans.
One troublesome lowlight of the new trade figures, though: The longstanding and immense American deficit in manufacturing hit its second highest monthly level ever.
On a monthly basis, the combined U.S. goods and services trade deficit fell by 2.74 percent in July, from an upwardly revised $55.51 billion to $53.99 billion. The August figure was the lowest since April’s $51.98 billion and the sequential decline the biggest since February’s 4.58 percent. Interestingly, by slipping 0.59 percent on month in August, from a downwardly revised $19.79 billion to 19.68 billion, the services surplus hit its lowest level since February, 2016 ($19.44 billion).
Overall exports edged up by 0.23 percent, to $207.41 billion, from a downwardly revised $206.25 billion, and combined imports dipped 0.14 percent sequentially, from an upwardly revised 261.75 billion to $261.39 billion.
On a year-to-date basis, the total trade gap is up 8.17 percent over the January-through July period –which looks like a pretty robust increase that brings the nation ever farther from the President’s goal of cutting that deficit. But as known by RealityChek regulars, these figures shouldn’t be viewed in isolation, and especially in isolation from the economy’s overall growth rate. And in the proper context, the July trade report shows further Trump-era progress toward bending that curve in a favorable direction.
More specifically, so far under the Trump administration, solid economic growth rates keep getting recorded even as the growth rates of that portion of the trade deficit most influenced by policy – the overall deficit minus energy (which is rarely covered by trade agreements and similar decisions) and services (where liberalization remains at an early stage) – keep sinking.
Here are the percentage change numbers for the last three January-through-July periods of the Obama years, and the first three of the Trump years for this “Made in Washington” trade deficit. In the last column, you’ll see the ratio between the two growth rates. Since July only begins the third quarter of each data year, my growth numbers measure a close proxy: expansion between the second quarters of each year specified. And both the growth and the trade deficit figures are based on calculations using their pre-inflation dollar figures.
Made in Washington trade deficit growth ratio
2013-14: +18.39 percent +4.78 percent 3.85:1
2014-15: +23.10 percent +4.51 percent 5.12:1
2015-16: +4.40 percent +2.29 percent 1.92:1
2016-17: +4.80 percent +3.86 percent 1.24:1
2017-18: +10.84 percent +5.96 percent 1.82:1
2018-19: +6.67 percent +4.04 percent 1.65:1
Although the figures bounce around to some extent, it’s clear that the economic growth rate for the Obama years were much lower than for the Trump years, while the growth of the Made in Washington trade deficit was consistently and considerably higher. Indeed, the only Obama year during which the ratio even approached Trump-ian territory was the weakest of the six growth years by far.
The July trade report makes an equally strong case that trade diversion favorable to U.S. interests is proceeding apace. It’s true that as the American merchandise trade deficit with China has narrowed significantly (by 10.35 percent year-to-date for the first seven months of 2019), goods trade shortfalls with other Asian countries have widened. For example, the July deficit with Vietnam ($4.74 billion) was the biggest ever. Ditto for goods imports from Vietnam ($5.56 billion).
In fact, year-to-date, the U.S. goods gap with the Pacific Rim countries excluding China is up 25.70 percent – nearly four times faster than the increase in the overall Made in Washington deficit. But the U.S. merchandise deficit with Mexico has risen even faster during this period – by 36.01 percent.
The same story emerges from examining goods import figures. Year-to-date globally they’re up 1.63 percent, from China they’re down by 12.31 percent, and from the other Pacific Rim countries they’ve risen by 5.28 percent. The gain for Mexico, however, is 6.35 percent.
A conspicuous problem area in the July trade report was manufacturing. Its deficit shot up by 17.27 percent on month from $83.63 billion to $98.07 billion – the second worst all-time monthly figure, after last October’s $101.65 billion.
Manufacturing exports in July dropped by 2.83 percent, from $94.28 billion to $91.62 billion, and imports climbed by 6.62 percent, from $177.92 billion to $189.69 billion.
Nor have manufacturing’s trade difficulties been confined to July. Year-to-date the deficit is up 2.99 percent, from $569.45 billion to $586.45 billion. January-through-July exports are off by 2.52 percent and imports are up one percent.
It won’t be possible till late October to say for sure whether or how greatly these trade problems are undercutting domestic manufacturing output, and even those Commerce Department figures will only bring the story up to the second quarter. But given the sector’s current recession, the case for some short-term trade and tariffs’ related losses looks pretty strong.