US trade deficit now the least of its problems

The good news is that the perennial US trade imbalance has halved in a year. The bad news is that overall imbalances have worsened. The budget deficit is larger than the trade shortfall ever was. With GDP falling and consumption only moderately down, that puts huge pressure on investment.

The narrowing in February’s trade deficit to $26bn is, at first sight, good news for the US economy. The perennial $700-800bn annual deficits had hollowed out US export sectors and caused a build-up in US assets held by foreigners, particularly Middle Eastern and Asian central banks. To cut the monthly deficit by 58% in a year without a catastrophic decline in the dollar is a considerable economic plus. Zhou Xiaochuan, governor of the People’s Bank of China, should be able to relax a little about the fate of his $2 trillion in dollar assets.

But the trade figures were disturbing in one respect: they showed US imports down by 28.8% compared with the previous year. That’s in line with the sharp declines reported in Asian exports, suggesting that the problem may be a worsening decline in world trade rather than just an inventory bottleneck. That could have ominous implications for future global economic growth unless it is quickly reversed.

At least, though, the trade deficit is no longer the largest US economic imbalance. That dubious accolade goes to the federal budget deficit - estimated by the Congressional Budget Office at around $1.8tr, or 12.5% of GDP, for 2009. That's more than twice the largest payments imbalance seen.

Even so, the budget deficit is a big problem. First quarter GDP is likely to be down sharply again. Its components are: consumption, set to decline only moderately; government spending, which will be sharply higher; net exports, which are looking less negative; and capital investment.

The only way the equation works out is for investment to fall sharply. Assuming that's what happens, it's bad news for the US economy's ability to rekindle healthy growth.