Monday, February 14, 2011

Manufacturing and the Trade Balance

One last post on US manufacturing before I drop the subject. The US economy, I've argued, is turning into a lean, mean, manufacturing machine. One of the best ways to see the improved competitiveness of US manufacturing over the past few years is to look at the US's imports and exports of physical goods. In particular, I like to focus on the trade balance excluding petroleum products (since changes in the US's imports of petroleum reflect changes in the price of oil much more than changes in the competitiveness of US manufacturing).

The chart below shows the US's exports and imports of merchandise excluding petroleum products. While both exports and imports fell sharply in 2008 thanks to the Great Recession, by the end of 2010 merchandise exports had nearly reached all-time highs. Manufactured imports had recovered somewhat, but not completely.

We'll have to see if this trend is sustained (and is therefore actually a trend), but it's starting to look like the improvement in the US's balance in manufactured goods over the past few years is significant and real. And that is an important piece of evidence of the change in US manufacturing competitiveness.

Of course, it's likely that part of this - but only a part of this - is simply the result of the (badly needed) rebalancing of global capital flows. Starting in the late 1990s and continuing until 2008, the US economy ran ever more massive current account deficits. By definition, when a country runs a current account balance it is borrowing funds from the rest of the world. (Recall that the current account balance is the broadest measure of trade flows, and includes merchandise trade, petroleum imports, exports and imports of services, and a few other more minor categories.) The level of borrowing by the US from the rest of the world through most of the 2000s was clearly unsustainable, and that flow of international lending to the US has roughly fallen by half from its peak in 2006, as illustrated below.

But the US's balance on non-petroleum merchandise has improved by even more, reaching levels not seen since the mid 1990s. I wouldn't be surprised if US's current account balance remains in the range of 3-4% of GDP for the next couple of years, as the US recovery picks up steam and saving by US corporations declines. But even if that happens, I would also not be surprised if the improvement in the US's balance on merchandise exports is here to stay.

No comments:

Post a Comment