The U.S. trade deficit in July, announced in the last week of August, was at a record level. The news stories made much of the fact that imports were about twice as large as exports and that the depreciating dollar has had no visible impact on the trade balance.
Two observations are worth making. One is that the initially announced trade statistics for any month are unreliable. The other is that a careful look at the trade data suggests that the deficit is no longer increasing. This is not yet encouraging regarding the effects of the dollar's depreciation, but it is good news from the viewpoint of the future growth of the U.S. economy.To understand why the first reports on monthly trade are unreliable, it is necessary to take account, somewhat tediously, of the procedure by which the data are compiled.
The statistics on U.S. merchandise exports and imports are based on documents that are gathered by the Customs Service and transmitted to the Census Bureau. Documents reporting shipments are often received by the Census Bureau with a lag. The lag is particularly long in the case of imports. The result is that the first report on any month's trade reflects the documents received in that statistical month, which runs 15 days into the next month. But those documents may be reporting imports that arrived in earlier months. In the past year a large fraction of initially reported imports had actually come in during previous months.
The second report of any month's trade, in the next monthly release of the Census Bureau, reallocates to the preceding month all documents carried over
from previous months. Even this report may be incorrect, but most of the distortion is removed. Thus one has to wait until August to have a reasonably usable figure for trade in June. For example, the latest Census Bureau report revised the initial deficit for June down from $14.2 billion to $13.3 billion. That comes to $11 billion at an annual rate, which is the basis on which the trade deficit is usually measured.
In the first six months of this year, the size of the deficit as initially reported was revised down in five cases and revised up in one case. The
average downward revision came to $16 billion at an annual rate. The one upward revision was at an annual rate of $26.5 billion. It is quite possible that the record deficit announced for July will turn out to have been overstated.
If we wish to form a judgment about what is happening to the trade deficit, the last month for which usable data are available is June. Since the
dollar started to fall in value in March 1985, we have usable statistics for the first 16 months of the depreciation.
In order not to be distracted by month-to-month fluctuations, we shall look only at quarterly figures for the U.S. trade deficit.
On that basis, we find that the deficit increased rather steadily from quarter to quarter in 1984 and 1985, reaching a peak in the last quarter of 1985. In the first half of 1986, the trade deficit was slightly lower than in the last quarter of 1985.
Thus one can say that the U.S. trade deficit has leveled off, after increasing almost steadily from the recession year of 1982. But it must immediately be added that an important influence on the trade deficit this year has been the decline in the price of imported oil. When that is taken into account, it has to be said that the depreciation of the dollar has not yet made itself felt. The non-oil trade balance of the United States has not yet leveled off.
There are reasons why the depreciation of the dollar may have a smaller impact than in the past. Debt-burdened developing countries are less able to expand their imports. And U.S. farm exports have been on a downward course. Even so, there is every reason to expect the lower value of the dollar to have its effect.
From the viewpoint of economic growth in the United States, the leveling off of the trade deficit, whatever its cause, is good news. In the past several years, growing domestic demand has been offset in part by the increasing external deficit, which has absorbed some of the growth of income. If the trade deficit has indeed stopped advancing, the expansion of domestic demand will be fully reflected in growing gross national product.