U.S. Demand Is Alive and Well
NEW YORK ( TheStreet) -- To many observers, March's U.S. trade report was a smashing success: Compared to March 2012, the trade deficit fell 11%!
To us, though, that wasn't necessarily cause for celebration. In our view, the trade deficit is a misleading metric. It counts imports as a negative, but high and rising imports are a sign of healthy domestic demand -- a good thing.
We think total trade (imports plus exports) is a better gauge of U.S. economic health, and March's report showed a 2% month-over-month drop, with exports falling 0.9% and imports falling 2.8%. Year over year, imports were down 5.6%, and first-quarter imports were a hair behind the first quarter of 2012.
So we asked: Should we be concerned about falling U.S. demand?
Thankfully, a deeper dive into the data suggests we likely needn't fret. Total imports have weakened lately, but most of that weakness comes from declining petroleum imports. Excluding petroleum products and adjusted for inflation, first-quarter imports rose 1.3% ($5.63 billion) over the first quarter of 2012. Demand for capital and consumer goods appears plenty healthy. As does petroleum demand overall -- we just happen to be importing less of it thanks to the shale revolution. This trend has been brewing for some time. As shown in Exhibit 1, which indexes total imports, petroleum imports and nonpetroleum imports to 100 in the second quarter of 2009 (total trade's cyclical low), total imports increased at a pretty healthy pace through 2011, then pulled back a bit in early 2012.
Nonpetroleum imports rose at a slightly slower pace but stayed positive through the second quarter of 2012, then plateaued. Petroleum imports jumped ahead at first, but they're down nearly 13% since the second quarter of 2011 -- and that's after a fourth-quarter 2012 rebound. Exhibit 1: Total, Petroleum and Nonpetroleum Imports Since Second Quarter 2012 Source: U.S. Bureau of Economic Analysis. U.S. Trade in goods, quarterly, seasonally adjusted, balance of payments basis. Second quarter of 2009 to fourth quarter of 2012. Data stop at fourth quarter of 2012 because first quarter of 2013's balance of payments data won't be released until June. This is just one more reason we're skeptical of claims the U.S. economy has a demand problem. That total imports stayed pretty firm despite petroleum's pullback speaks to the underappreciated strength of overall domestic demand. And that's just one component. Consumer spending has grown for 13 straight quarters (and hasn't fallen since the second quarter of 2009) and is at all-time highs. Housing's risen for eight straight quarters, as has business investment, which logged its all-time high in the first quarter.
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