The Startling Dropoff in Trade Flows

The Startling Dropoff in Trade Flows The trade release has already been remarked upon, in terms of the dropoff in both exports and imports signaling a synchronized recession. [1], [2], [3], [4] I have little to add here, except for plotting the “cliff-diving” in log real terms.

trad1.gifFigure 1: Log real goods exports (blue), real goods imports (red), real goods imports ex.-oil (green), seasonally adjusted. NBER-defined recessions shaded gray (assumes recession has not ended by December 2008). Source: BEA/Census trade release of 13 January 2009 and NBER.I do want to follow up on a point I made in an earlier post. If import prices are mismeasured due to a combination of invoicing in dollar terms and the price matching model used by BLS for export/import prices (as argued by Nakamura and Steinsson (2008) [pdf]), then two points flow from this assumption. First, as discussed earlier, current GDP is higher than measured by the official statistics because imports are lower.

Second, what I didn’t mention earlier, is that with import volumes decelerating even faster than implied by the official statistics, the prospects for future US output are probably darker than we think, as import volume growth has plunged more than reflected in the official statistics (with slower import volume growth reflecting collapsing consumption).

trad2.gifFigure 2: Year on year growth rate in real goods imports (blue), and “alternate” growth rate assuming price mismeasurement (actual price change is twice as fast as official) (red), all calculated as 12 month log differences. Source: BEA/Census trade release of 13 January 2009, BLS import/export price index release of 14 January 2009, NBER, and author’s calculations.Commenting on the trade flows, Ian Shephardson of High Frequency Economics remarked to WSJ RealTime Economics: “As far as we can tell, trade flows have been crushed by the credit crunch, which has reduced demand for traded goods and services and made it more difficult for exporters and imports to obtain trade finance. The result is that the data have become impossible to forecast. We now reckon real fourth quarter exports fell 27%, with imports down 16%.” This comment could be taken as good news or bad news. It’s bad news to the extent that the financial crisis is affecting aggregate demand via yet another channel (see [5], [6]). It’s good news if one believes that problems in the credit markets are steadily disappearing.

By the way, the dropoff in trade prices is also quite remarkable. Here’s export and import (ex oil) prices, from today’s release.

trad3.gifFigure 3: Goods export prices (blue), and goods import prices, ex.-oil (red), 2000=log(100). Source: BLS import/export price index release of 14 January 2009, NBER, and author’s calculations.The non-oil terms of trade are therefore deteriorating, given the faster drop in export prices (recall the plotted series are in logs). The total terms of trade are, in contrast, improving and are back to 2007M01 levels.

Originally published at Econbrowser and reproduced here with the author’s permission.