Vital Signs: The Fading Force of Trade

On tap: November trade data, December import and export price figures, November pending home sales

Foreign trade is proving to be an important ingredient in the U.S. economy's resilient performance. In three of the past four quarters up through the third period of 2007, the shrinking trade deficit contributed more than a percentage point to economic growth. While the trade gap should keep narrowing, it is unlikely to maintain the strong pace of last year.

Early foreign trade indicators for the final quarter of 2007 still look positive. Rising oil prices did push up the October trade gap slightly to $57.8 billon and economists are forecasting a larger deficit in November. But the key number to look at when considering trade's part in real gross domestic product is the price adjusted totals. On this front, trade improved in October and could do so again in November if economist's expectations of rising exports come through in the numbers.

Exports have garnered a lot of the attention. Through October, shipments abroad are up 12% over the same period in 2006. Some of this strong gain is due to the weaker dollar. Looking at the monthly export price data, the falling currency is prompting some exporters to raise the price of their goods in dollar terms without a big risk of losing market share abroad.

But a somewhat overlooked part of the trade equation is the sharp slowdown in import growth. Through October, imports are up just 5.1% from the same period in 2006, and that's including the hit from higher oil prices. For the full year 2006, imports rose 10.4% over the 2005 total.

If you adjust for prices changes, the contrast between exports and imports is even starker. Real export growth through October is 8.3%, vs. 1.9% for imports.

Weaker domestic demand could keep import growth down, but it will be a challenge for exports to keep growing at the recent pace. Global economic growth is losing some momentum, buffeted by the widening credit market issues, a weaker U.S. dollar, high oil prices, and the wobbly U.S. economy. Already, October trade data showed some slippage in export growth on a price adjusted basis. And the Institute for Supply Management's December factory activity index showed a marked slowdown in the growth of export orders.

The fundamentals are still in place for trade to be a positive force for the U.S. economy in 2008, just don't expect the same jolt it provided in 2007.