Wednesday, August 11, 2010

Balance of Trade

The commerce department reported yesterday a increase in the Trade Deficiet yesterday to $49.9 billion for the month of June.   As a number, it doesn't look like a very good one, and based on the reaction of the equities market yesterday and today's open, it appears to be a number the market doesn't like.  

Looking at a news article like this doesn't give the whole perspective of what this number really means.   The US Census Bureau website publishes these number historically and can be found on .

I put together the following graphs to see how this number has trended historically.   The first graph shows the historical exports vs imports since 1992. The graph shows a steady increase in the trade deficit over this time period.   It is interesting to see just how severe the 2008/2009 time period was with a sharp decline in trade.   The 2010 numbers are extrapolated from the first 6 months of the year, but indicate a significant rebound from the previous years. 

The trade balance numbers are also reported showing a breakdown between Goods and Services.   Goods are defined as tangible objects that increase the utility of the purchaser.   Services are defined as activities where the buyer typically doesn't obtain the exclusive ownership of the activity, but obtains economic value from the use of the service.   The next graph shows historically trade balance broken out by these two catagories.

The data shows that the US has been an historical net exporter of Services and a net importer of Goods.  

The data in the next graph shows historically the trend with Services.   The graph shows a significant increase in Service exports throughout the last decade.

While it is very tempting to draw conclusions from this data, it  is  probably necessary to look at the components of trade to get a better understanding of good investment opportunities.    It is clear that that the US strength in the global markets lies in the Services sector, which seems logical.   American's ability to sell it's intellectual capital is something that you would expect from a highly educated and productive society.   The fact that we are a net importer of Goods would indicate that manufacturing is a lower value activity that is best supplied by developing societies with cheaper labor forces.   

The arguement that the US has to 'make things' to be competitive is a very popular one.   While the US has shown a strong competitiveness in offering high value services to the rest of the world, the fact that we spend that capital and more on the things we need in this country doesn't leave us with a good feeling about our economic future.   Does the US have to be be more competitive in the Goods sector to get us on an equal footing, or can Services be increased to make up the difference?   Can our Services capabilities be used within our country to do that.

There is much more to the numbers.   More to follow.

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