Statement on September Trade Data

The U.S. Census Bureau today released its estimates for the U.S. trade deficit in September 2005. According to the Census, the trade deficit in September increased to a new record of $66.1 billion, up from a revised $59.3 billion in August. The total seasonally adjusted trade deficit this year thus stands at $560 billion, potentially brining the annual total to another record high, relative to the size of the economy. For the first nine months of this year, the inflation-adjusted goods trade deficit was 5.8 percent higher than for the same period in 2004. The trade deficit is hence growing much faster than the economy. The Bureau of Economic Analysis (BEA) at the Department of Commerce already estimated a few weeks ago that the trade deficit in the third quarter of 2005 reached a record high of 5.7 percent of gross domestic product (GDP). Today’s figures confirm the trend of an ever widening gap of imports and exports.

The new trade deficit figures cast another shadow on the U.S. economy, which has seen a gradual slowing of growth this year. Consumer spending has remained robust largely because of continued heavy borrowing by households, not because of increased employment or better wages. According to the BEA, the rate of growth of investment by families in their homes has also slowed in the third quarter, which may be a harbinger of an end of the housing boom that has carried much of the economy in recent years. At the same time, the rate of change in business investments also declined in the third quarter, estimates the BEA. Against this backdrop, today’s figures show that U.S. businesses have trouble selling their wares abroad, while imports continue to grow. Exports declined in non-inflation-adjusted terms by $2.8 billion from August 2005 to September 2005.

The decline in the trade deficit in September is not rooted primarily in higher oil prices, although they played a factor. The U.S. trade deficit in goods rose to $71.1 billion in September from $64.1 billion in August. The vast majority of this change – 81.3 percent – came from a deterioration in the non-petroleum goods deficit. While the price increases for petroleum following the hurricanes contributed to the rising trade deficit, sectors other than petroleum products had a substantially larger effect on the declining trade balance.

Much of this change occurred in the advanced technology sector. The deficit in these products, which include computers, biotechnology, information technology, and aerospace materials, among other items, increased by $2.3 billion in September to its second highest level on record, $5.6 billion. Although all of the deterioration in the trade balance in advanced technology products can be attributed to a sharp drop-off in aerospace, amid a strike at Boeing, the overall trend has been a widening gap in hi-tech imports and exports for 2005. For the year, the U.S. has a deficit of $31.4 billion in these products, compared to $23.6 billion for the same period in 2004. That is, even after correcting for the jump in the aerospace deficit the U.S. continues to lose competitive ground in these crucial industries.

In addition, U.S. deficits with several of the top deficit countries widened again in September. Among the top five deficit countries, the deficit with China grew by $1.6 billion, the deficit with Canada by $0.8 billion, and the deficit with Mexico expanded by $0.1 billion. In comparison, the deficit with Japan shrank by $0.2 billion and the deficit with Germany dropped by $1 billion. In sum, though, the U.S. expanded its bilateral deficits with the five countries with which it already has the largest deficits. Deficits with European countries, in particular, could expand again as the dollar has gained in strength in recent months, making exports to the European Union harder to sell.

The trade deficit remains a trouble spot for the U.S. economy as it widens to new record highs in 2005. Since this deficit has to be financed by borrowing abroad, the question arises as to how long foreign lenders, particularly China, Japan, the UK, Taiwan and Germany, will lend to the U.S. at comparatively low interest rates. A widening trade deficit could ultimately put increasing pressures on U.S. interest rates, thus potentially contributing to an economic slowdown.

Christian E. Weller is senior economist at the Center for American Progress.