Unless your family is in the wheat or beans business (wheat and soybeans exports have more than doubled when q1 08 is compared to q1 07; total food and feed exports are up 50% y/y), there actually wasn’t a lot to like in this month’s trade release.

Yes, the headline deficit fell relative to February, but February looks to have been a blip. The rolling 3m deficit has been stable at around $59.5b since December. And much of the fall in the deficit came from a big fall in the volume of imported petroleum. Petrol imports (in volume terms) were running ahead of last year’s pace in January and February. March brought the year to date total down below last year’s total, as the volume of imported crude was about 15% lower than the volume of imported crude last March. The fall in volume was large enough to offset a rise in price. The price of imported crude jumped from $84.76 to $89.85, but the seasonally adjusted US petrol import bill still fell by $2.2b, from $37.4b to $35.2b.

The real problem though was on the export side. Export growth looks to be slowing. The headline nominal growth numbers look good. Y/y non-petrol goods exports are up by a healthy 14.8% -- far more than the 3.3% growth in nominal non-petroleum imports. But if the rise in agricultural exports and exports of industrial supplies (petrol, chemicals, metals) is stripped out, export growth was only up 5.2% 8.8% in nominal terms (oops; my bad).

Slower growth among those exports whose price hasn't obviously increased is a warning sign.

A plot of real goods exports and imports shows a small monthly fall in exports in March.*

The data bounces around a lot, but it certainly seems that the pace of growth in real US goods exports is slowing. March real goods exports fell back below their level last June (see Exhibit 10). The usually reliable FT missed this part of the story, opting to highlight ongoing growth in nominal exports ("second-highest monthly" total in history despite the down tick from February) rather than the not-so-strong real growth.

Dollar depreciation helps, but a slowing world economy hurts. Countries that are spending more on oil may have a bit less to spend on other goods. Plus, in some sectors the US may be hitting capacity constraints. Boeing is a case in point: it needs to get its 787 assembly line sorted out …

The improvement in the nominal trade balance – plotted on a rolling 12m basis* – also has stalled.

It isn’t hard to see why: oil

And there is more bad news in the pipeline. Project out $89 a barrel oil for the remainder of the year and the oil balance deteriorates by over $100 billion in 2008. Project out $110 a barrel oil and the oil balance deteriorates by over $200 billion in 2008. The average price of imported oil in q1 of 07 was only $52 a barrel; the average price for all of 2007 was only $64.27 a barrel. That calculation, by the way, assumes that the volume of petrol the US imports continues to fall slowly.

One other point:

The improvement in the US trade balance with China (the deficit was $2.2 billion smaller in q1 2008 than in q1 2007) comes far more from the fact that US imports from China have essentially stopped growing (up $1.3b) than from a rise in exports (up $3.5b). Nominal imports from China in q1 were up only 1.8%; and nominal imports from Asia were up only 1.6%. Imports from Asia actually are growing at a slower nominal clip than imports from Canada or Europe. I am not sure if that reflects “J-curve effects” (flat volumes and rising prices lead to higher nominal imports are an exchange rate move) or petroleum and gas imports. The US obviously imports energy from Canada, and I think it also now imports some refined gasoline from Europe. Energy experts please correct me if I am wrong!

*Thanks to Arpana Pandey of the CFR for help with the graphs

UPDATE: There is nothing like a bit of attention from the big blogs to inspire a bit of additional work. Y/y real goods exports are up 9.5% -- while y/y real goods imports (non-petrol) are down 0.8%. And the y/y growth in real goods exports is fairly broad-based. Ag export volumes are up 13.4% and real exports of industrial supplies are up 13.1%, but volumes for everything else are up 8.2% as well. The trouble is with the quarterly pattern of growth, which suggests some deceleration in export growth.

q1 08 real goods exports are 0.8% higher than q4 07 real goods exports (an annualized growth rate of 3.3%) and q4 07 real goods exporters were 0.6% higher than q3 real goods exports. the q3 over q2 growth rate -- 5.6% -- and the q2 over q1 growth rate -- 2.1% -- were much higher. Basically the strong y/y growth reflects strong growth in the middle of 07 rather than strong ongoing export growth.

Non-petrol real goods imports were down 1.9% in q1 08 (v q4 07) -- which can be compared to a 1.7% quarterly fall in q4 07, 2.3% quarterly rise in q3 and 5% quarterly rise in q2.

Finally, i should note that I initially miscalculated y/y nominal growth  in non-ag, non-industrial supply exports.   The right y/y growth rate is 8.8%, not 5.2%.  My apologies.

I got my hopes up after the January TIC data. For the first time in a long time, the TIC data matched what I though I knew about the global flow of funds. Central bank reserve growth was very strong in January. Recorded official inflows were strong. The data matched.

It couldn’t last.

For every January, there is a February. If you believe the US TIC data, the world’s central banks stopped buying US assets. Just stopped. Official purchases (net) went from positive $78.3b in January to negative $9 billion in February. That is kind of like how foreign investors stopped buying “private” US mortgage backed securities and CDOs last summer.

A $90 billion swing in monthly capital flows is huge. It is hard to square with the notion that central banks are a stabilizing force in the market.

Of course, it is also hard to square with a lot of other data. If you believe that central banks were net sellers of US assets in February, well, you probably shouldn’t be reading this blog.

Official flows likely did fall off a bit in February -- at least relative to their torrid January pace. Global reserve growth seems to have slowed a bit. But global reserve growth -- and I suspect official purchases of US assets -- didn't fall by anything like the TIC data indicates.

The TIC data for example shows that official investors reduced their Treasury holdings by $6.4b (short and long term) and their agency holdings by $4.4b. However, the Treasuries the New York Fed held in custody for other central banks rose by $13.34b between January 30 and February 27. The Agencies held by the New York Rose by $15.49b. Net sales of $10.8b or net purchases of $28.8b. Take your pick.

Anyone trying to write a “central banks and China stopped buying Treasuries story” also might want to look at the rise in central bank holdings at the New York fed between February 27 and April 3 ($67.27b) and the rise in central bank Treasury holdings over the same period ($29.49b). Central banks bought a lot of US debt in March.

The TIC data shows that China didn’t increase its US holdings at all in February. Net long-term purchases of $10.73b were offset by net short-term sales of $10.64b. Total Treasury holdings fell by $5.7b, and Agency holdings only rose by $1 billion.

That makes no sense. China’s reserves rose by something like $47b in February after adjusting for valuation gains. Keeping the dollar share of China’s reserves at around 70% would have required China to buy about $40b of dollar-denominated debt. Even if you think China is diversifying at the margin, it bought some dollar-denominated assets and some US debt. (more detail follows)

The data at the back of the IMF's latest WEO (table A16) indicate that the emerging world’s savings surplus stems from a “glut” of savings, not a “drought” of investment.

In 2007, the savings rate of the emerging world savings was almost 10% of GDP higher than its 1986-2001 average. Investment was up as well – in 2007, it was about 4% higher than its 1986-2001 average. However the rise in the emerging world’s savings was so large that the emerging world could invest more “at home” and still have plenty left over to lend to the US and Europe. That meets my definition of a “glut.”

The big drivers of this trend. “Developing Asia” and the "Middle East." Developing Asia saved 45% of its GDP in 2007 -- up from 33-34% in 2002 and an average of 33% from 1994 to 2001 (and 29% from 86 to 93). Investment is up too. Developing Asia invested 38% of its GDP in 2007, v an average of between 32-33% from 1994 to 2001. Investment just didn't rise as much as savings. The Middle East also saved 45% of its GDP in 2007 – up from 28% of GDP back in 2002 and an average of 25% from 1994 to 2001 and an average of 17-18% from 1986 to 1993. Investment is up just a bit -- at 25% of GDP in 2007 v an average of 22% from 1994 to 2001.

It is historically unusually for an oil importing region to be saving so much when the oil exporters are also saving so much. Usually a rise in the savings of the oil exporters is offset by a fall in the savings of the oil importers. The enormous rise in Chinese savings even as China’s oil import bill has soared (along with oil export revenues and oil exporters’ savings) implies a bigger fall in the savings of other oil importing economies.

Government policy has played a big role in the high savings rates in both regions – whether the undistributed profits of Chinese state firms (a policy choice) or large fiscal surpluses of the Gulf financed by the undistributed profits of the Gulf’s state oil companies. It isn’t an accident that the emerging world’s savings glut has coincided with a rise of state capitalism – and a surge in demand from states and state enterprises for “flying palaces.” I suspect the emerging world’s savings glut largely reflects a glut in government (and SOE) savings.

Dr. Delong has argued that this savings surplus will persist for a long time, keeping US and European rates low and keeping housing prices in both the US and Europe higher than otherwise would be the case. Krugman's fear that home prices need to fall significantly to bring the price-to-rent ratio closer to its long-term average won't be borne out.

Possibly.

However, I don’t think it entirely implausible that savings rates in both Asia and the Middle East might start to converge toward their long-term average. What goes up sometimes also comes down.

An end to the emerging world’s savings glut would not be such a bad thing either. It would mean than the young and poor were supporting global demand growth – not the old and rich. That makes more sense to me.

Update: some type-os were cleaned up after the initial post.  PGL's commentary on this post is also worth pondering, even if I am not fully convinced (see the comments).

If I had too pick two stylized facts about the global economy that I thought were under-appreciated, the first would be the enormous increase in emerging market reserves.

The IMF’s WEO data (remember, I like to start by looking at the IMF’s numbers, not its words) indicates that the emerging world added $1236 billion to their reserves.   Throw in another $149b in official outflows (think sovereign wealth funds) for $1385b increase in the government assets of the emerging world.   That total includes some valuation gains, but it excludes the increase in the government assets of the Asian NIEs (Hong Kong, Korea, Singapore, Taiwan), the increase in the foreign assets of China’s state banks and the increase in Japan’s reserves.    Back in 2001 and 2002, the increase in the foreign assets of the emerging world was in the $125-200b range.

Emerging market governments now drive the global flow of funds – and allow the US to sustain a large deficit even as private demand for US assets (relative to US demand for foreign assets) has collapsed. But, as Steve Waldman has pointed out, this rise in official flows has been the core theme of this blog – so it shouldn’t be news.

The second fact is the extent to which Europe – yes, not-so-sclerotic Europe – has replaced the US as the engine of global demand growth.

By demand growth, I mean demand growth in excess of supply growth.   That disqualifies China, as Chinese supply has grown faster than demand.   Not so for Europe as a whole, or at least the countries that are part of the European Union (i.e. Norway is not counted).     Between 2005 and 2007, the IMF estimates the United States balance of payments deficit shrank by $16b, while Europe’s expanded by $170b.

As a result, a rise in Europe’s deficit not a rise in the US deficit is offsetting the rise in the emerging world’s rising surplus.

Consider the following graph, which shows the US external deficit, the aggregate external deficit of the European Union and the aggregate surplus of the emerging world (plus the Asian NIEs).   I have inverted the sign of the US and EU deficit – a bigger deficit is consequently a bigger positive number.

That is a change from the 2002-2005 period – when a $295b rise in the US deficit balanced most of the $382b rise in the emerging world’s surplus.   It also implies that if the “rich advanced economies” are looked at as a whole, there has been less adjustment than might be expected.    The overall deficit of Europe and the US continues to rise – which has allowed an ongoing rise in the overall surplus of the emerging world.    In that sense, the world hasn't adjusted.

The IMF forecasts the recent trend will continue in 2008 – with the US deficit falling by $124b (even with oil at $92b) and Europe’s deficit rising by $92b.   Today’s trade data suggest that may be a tad optimistic.   The nominal trade deficit for q1 could be larger than the nominal deficit in q4.

If the US oil import bill remains at its current level, the US petroleum deficit (imports net of exports) would deteriorate by about $110b.    Consequently, the US non-oil deficit would need to fall by $235b or so to bring the US deficit down to the level the IMF forecast.   That is possible – though only if non-oil imports don’t continue to jump up expectedly (as they did in February; non-oil goods imports were $140.8b – well above their levels last fall).     The fall in US interest rates should help the US income balance, but bringing the overall deficit down as quickly as the IMF forecast requires a bigger change in the trade balance than has appeared in the data so far this year.  (more follows)

Martin Wolf’s column – “The prudent will have to pay for the profligate” – focuses on the need for the broad public to help out some who took large risks in the boom, whether individuals who borrowed too much on the expectation that home prices only go up or lenders who lent to much on the assumptions that home prices will only go up so no doc/ no money down loans were safe.

Wolf notes that “In such predicaments, the government always emerges as the lender, borrower and spender of last resort”. US government specifically has emerged as the lender of last resort to both the world’s investment banks and to American households. Tim Geithner of the New York Fed made the case in his testimony today that investment banks now perform some of the functions of banks and also finance themselves by “borrowing short to lending long” and thus are exposed to market equivalent of a bank run. That provides the intellectual justification for the provision of Fed credit to investment banks even though their creditors are not small depositors. The FT reports that the US government – counting the Agencies as a de facto part of the US government thanks to the expectation that they are too big and too important to fail – is now the ultimate source of financing for most US home purchases (Scholtes of the FT: “Fannie, Freddie and the Federal Home Loan Banks, a network of bank co-operatives founded during the Great Depression, provided 90 per cent of the financing for new mortgages at the end of 2007”)

Of course, the various US agencies involved in housing finance are just intermediaries. They borrow the funds that they lend to US households in the market. And who supplies them – and for that matter – the US government with the financing it needs?

Other governments, in large part.

And generally governments in parts of the world that are far poorer than the United States. The very wealthy small Gulf states are the obvious exception.

Ergo, in Wolf's terms, the world’s poor are financing the world’s profligate.

That was implicit in my lengthy (and rather technical) post on the IMF data on global reserve growth.

But it also shows up in the New York Fed’s data on the custodial holdings of foreign central banks. From that data we know that the world’s central banks added almost $70b ($69.8b) to their Treasury and Agency portfolios in the month of March alone (using the data from April 3 and March 6 data releases; the increase between the March 27 and the February 28 release would be a bit smaller – “only” $50b). That is a huge sum – almost $840b annualized. SAFE’s $2.8b purchase of Total is almost trivial by comparison.

The increase between January 3 and April 4 is only slightly less impressive -- $150.8b, or $600b annualized. And the Fed’s data usually understates central bank purchases.

I would go even further – and argue that the world’s poor are effectively subsidizing the world’s profligate.

Net (private) financial inflows to the US in q1 2007: $466b

Net (private) financial inflows to the US in q2 2007: $552b

Net (private) financial inflows to the US in q3 2007: $238b

Net (private) financial inflows to the US in q4 2007: $195b

Notice a change?

All these numbers are a bit overstayed because they count some official flows as private flows. The 2007 current account data hasn’t been revised to reflect the most recent survey. But the scale of the under-counting didn’t change radically over the course of the year.

Private inflows into the US fell dramatically after August.

Private outflows to the US also fell.

The best explanation for this is the unwinding of the shadow financial system – one that was largely based offshore. A lot of entities (to use the terminology of the shadow financial system) were legally domiciled offshore. However, they were issuing short-term dollar debt to American investors to finance the purchase of long-term US dollar debt. Carlyle Capital is the perfect example. It was legally based in London for tax reasons but managed out of New York, issued short-term dollar debt and held long-term US debt.

A chart that plots quarterly private inflows and outflows as a share of GDP shows the change.

The chart is noisy, but it still shows that the last time inflows and outflows were this low relative to GDP was in q3 2001. And 9.11 probably had something to do with that data.

To show how large the shift could be, I assumed that q1 2008 and q2 2008 would be like q4 2007 and plotted the rolling four quarter sums v GDP. A rolling four quarter sum smooths out some of the volatility in the quarterly series; projecting the current fall forward is a way of highlighting just how large the recent fall has been.

Unless something changes and private flows really pick up (and they did not seem to pick up in the January TIC data) “financial globalization” has been scaled down.

The US recently released its current account data for the fourth quarter. Among other things, the data showed another $150b in official inflows in q4, bring the total for 2007 up to around $400b. In both q1 and q4, official inflows awere almost as large as the US current account deficit. Official flows in q2 and q3 were smaller.

The official flows data – I suspect – will be revised up, both to reflect the 2007 survey and eventually the 2008 survey. Sovereign funds and central banks likely combined to add about $1400b to their assets in 2007. I doubt only $400b was invested in US assets. A growing sum is likely managed by private fund managers and thus not registering in the US data. The $50b increase in official holdings of Treasuries in the 2007 data looks awfully low to me, not the least because the Fed's custodial holdings of Treasuries for foreign central banks increased by $70b.

I’ll take credit for arguing (or perhaps insisting) that the US data understates official inflows – and for arguing that the official sector’s already large purchases of US debt would likely have to increase during a US slump to avoid a dollar right. The argument that dollar depreciation was a necessary part of the process that would bring the US deficit down also seems broadly right.

But I also got one big part of the US current account wrong.

Back in 2006 I predicted that the income balance would deteriorate quite significantly in 2007. My logic was pretty simple: the average interest rate that the US was paying on its (mostly dollar-denominated) external debt was well below the average interest rate the US paid on its (mostly dollar-denominated) external lending. I expected the US borrowing rate would rise faster than the lending rate, and that – together with the ongoing rise in US external borrowing – would drive a significant deterioration in the US income balance.

That has not happened. The income balance actually improved in 2007. Richard Iley (see our debate in late 2006) was right. Consider the following graph. I expected the gap between a line plotting the US current account deficit (as a share of US GDP) and the line plotting the US trade deficit (goods and services) to get bigger. It didn’t.*

* The data here is the quarterly current account balance (seasonally adjusted) as a share of quarterly GDP (also seasonally adjusted). The sign has been inverted so a deficit is positive and a surplus is negative. That way a rise in the trade deficit is indicated by a rise in the line labeled trade balance.

Much more follows

The Fed's dramatic policy announcement has justifiably overshadowed the January trade data, which didn't tell us much that we didn't already know. Suffice to say that the rise in the overall deficit reflects a rise in the US imported oil bill.

Seasonally adjusted oil imports were $39.5b in January, up from $24.84b last January. The average price of imported oil was $84.09. If the net oil import bill (seasonally adjusted) averages $35b a month -- its January level -- the net petroleum balance would deteriorate by $125-30b. That though may be a bit too optimistic given recent moves in the oil market. Any way you cut it, oil will be a big drag -- and likely keep the overall trade deficit up.

Non-oil imports though are falling, in both nominal and real terms. January non-petroleum goods imports were around $133b, down from $136-137b in q3, and $138b as recently as November. Real imports are also falling.

Nominal exports are still rising, but real exports seem to have mostly stalled. The following graph -- prepared with help from Arpana Pandey -- shows real goods exports and real goods imports (from the BEA data) since 2004.

The rise in dollar terms reflects higher agricultural prices and the like. Ag exports are up 43% in nominal terms -- paced by a doubling of soybean exports and big increases in corn and wheat exports.

Alas, the rebalancing in this case is a shift from exporting to the US to exporting to Europe -- not a shift from export-led growth toward domestic-demand led growth.

Alan Beattie, in the FT.

Mark Page, research director at Drewry Shipping, a consultancy in London, says Asia-US container trade saw a big slowdown that began in the middle of 2007, with demand for the whole year perhaps only 2 per cent higher than in 2006. But ships were redeployed to the routes between Asia and Europe, north Africa and the Middle East, where container trade grew by around 20 per cent.

It is hard to fudge container data. The rise in shipping from Asia to Europe and the Middle East helps to explain how the Baltic freight index decoupled from the US economic cycle (UPDATE: NOTE COMMENT AT THE END). The Baltic dry index rose strongly for most of the year even as the US (non-oil) import growth slowed in 2007. Things obviously changed a bit in November.

It also explains why Europe is increasingly putting pressure on China to appreciate against the euro, not just the dollar -- and why Europe seems to worry more about about the risk that it might attract too much investment from sovereign funds than to worry about the risk that it might attract too little.

On Saturday, the Boston Globe published an oped that I wrote. It is the first oped that I have ever had published.

The headline on the oped though is a little bit misleading.

I focus more on the perils of pegging to a weak dollar rather than the perils of a weak dollar per se.

One of the strange features of today’s global economy is that many countries with strong economies have weak currencies by virtue of their link to the dollar. That discrepancy distorts the global economy in a number of ways:

-- It keeps the US trade and current account deficits larger than it otherwise would be.

-- It means the adjustment against the dollar is unbalanced. There is a difference between a world where the Euro rises against the US and Asia and a world where the Euro and most Asian currencies rise against the dollar.

-- It requires a ton of government intervention in the foreign exchange market, a fact that necessarily will lead to rising government ownership of a host of financial assets.

-- And it has led a number of countries that peg to the dollar/ manage their currencies against the dollar to adopt wildly pro-cyclical macroeconomic policies.

As a result, the weak dollar is much more of a problem in the countries that tie their currencies to the dollar than in the US. I agree with Dr. Krugman: right now, the US benefits from a weak dollar. Exports are helping to support the US economy and reduce the trade deficit. In the oped, I argued:

The alternative to a weak dollar is a US monetary policy aimed at supporting the dollar rather than stabilizing economic activity in the United States - an even less attractive option.

The Gulf and China though have many alternatives other than continuing to manage their currencies against the dollar and as a result import US monetary policy -- a policy that will be directed at stabilizing the US economy, not stabilizing their economies.