Learning How to "Buy American"

April 9, 2009 - 4:37PM

U.S. imports plunged 5.1% to $152.7 billion in February while exports rose 1.6% to $126.8 billion, causing the U.S. trade gap's contraction to $26 billion from $36.2 billion in January. Americans are learning how to "buy American" by, well, not buying foreign goods.

Consensus estimates had called for the trade deficit to narrow to $36 billion on a 6.7% drop in imports and 5.7% decrease in exports.

The U.S. trade loss has plummeted 58% in the past year. The drop in imports was mostly due to lower demand for industrial supplies and capital goods. Year-over-year imports are down 28.8%. Imports from China and Japan, the two countries holding the largest trade advantage over the U.S., fell to 3 and 21-year low, respectively.

Year-over-year exports are off 16.9%, yet every major category ex-services posted a rise in February. Semiconductor and telco equipment propped up capital goods exports which rose 0.5% to $33.3 billion. Consumer goods exports soared 12%, industrial supplies advanced 0.6%, and foods and feeds climbed 4%.

Even though petroleum imports remain elevated, the nonoil deficit dropped to $22.2 billion during February from $31.3 billion the prior month.

Despite oil imports sinking 7.4% to $13.7 billion, we can expect ensuing import data to depict higher petroleum imports. The average price per barrel in February was $39.22, significantly lower than the average price in March and April. In a separate report, the Bureau of Labor Statistics said import prices climbed 0.5% in March, mostly due to a 10.5% jump in petroleum products.

Yet in the same report, ex-petroleum prices dipped 0.7%, suggesting broader deflationary pressures will persist. Headline export prices were also down, falling 0.6% during March.

While Wall Street frets over deflationary pressures, Main Street can take solace in the fact that we are slowly learning, albeit the hard way, that a critical step towards getting our house in order is moving the trade deficit back to equilibrium. In order to finance the perennial U.S. trade debt, we've been forced to balance out the current account with increases in capital account funding, mostly via foreign direct investments.

The $26 billion shortfall, though still exorbitant, is the smallest since 1999.