I have been asleep at the wheel again. I failed to reprimand the media for failing to highlight the drop in the trade deficit over the last two months. The deficit for October and November averaged $58.5 billion, $10 billion less than the peak of $68.5 billion in August. As I�ve said in the past, the trade deficit is a much bigger deal than the budget deficit, most obviously for the reason that it is more than 3 times as large (more than twice as large if we count the federal government�s borrowing from Social Security). This decline in the deficit should have been on the front page, not buried in the business section. The story behind the decline is a mixed bag. The biggest factor was a sharp drop in oil prices, which accounts for $8 billion of the decline from the August level. Exports have increased over this period, but they have been growing at about the same rate for the last two years. There has also been a drop in real imports over this period, most notably a drop in industrial supplies of approximately 7 percent over this period. Why did imports of industrial supplies fall so sharply? It�s unlikely that domestic producers have suddenly become much more efficient. It looks like manufacturers are cutting back their demand, presumably in anticipation of lower demand for their output. If that proves to be the story, then the decline in the trade deficit is not all good news.
--Dean Baker