Comment & Analysis

The shape of the global recession has played a big role in the progress toward rebalancing world trade, especially in the U.S. The U.S.-led recession has greatly reduced the flow of imports onto American shores, while the Asia-led recovery is boosting U.S. exports. As a result, the trade deficit has shrunk by more than half over the past three years, greatly reducing the U.S.s need for foreign capital. The question now: Can this progress continue?

This week will offer another signpost on the road to global rebalancing, when the Commerce Dept. releases its September trade data. The volume of U.S. trade, exports plus imports, picked up last quarter for the first time in a year. Based on third-quarter GDP data, exports increased at a 14.7% annual rate last quarter, the first advance in a year and evidence of stronger global demand. Imports rose at an even faster 16.3% clip, the first upturn in two years, reflecting the recovery in domestic demand.

The Commerce Dept. will use the September data to update their 3.5% estimate of last quarters GDP growth. The initial report showed a widening in the trade deficit that subtracted 0.5 percentage points from overall growth. To some extent, the cash-for-clunkers program boosted quarterly imports through August, but that effect will reverse in the fourth quarter, and trade may even contribute positively to U.S. economic growth.

Imports are certain to keep rising as the U.S. recovery continues, but the outlook for exports is especially bright. Global GDP last quarter accelerated to an estimated 2.8% rate, say economists at J.P. Morgan Chase (JPM), and they expect a 3.4% clip in the fourth quarter. Exports of industrial materials and capital goods, especially to emerging market economies, account for the lions share of recent gains. Shipments abroad should pick up further as the recoveries in Canada and Europe gather pace. The October manufacturing survey from the Institute for Supply Management continued to show broad growth in export orders.

The weaker dollar also adds support to U.S. exports, by making goods more competitively priced in foreign markets. The trade-weighted dollar had surged 17.9% from July 2008 through March 2009, as investors sought the safe haven of U.S. securities, but it has retraced 9.6% of that rise through October. The greenback will most likely continue to weaken for a time, given the Federal Reserve's aim to keep U.S. interest rates exceptionally low compared with rates abroad. That disparity makes dollar-denominated assets relatively less attractive.

Looking further ahead, however, the shrinkage in the trade deficit is a key support under the dollar: The less the U.S. needs to borrow from abroad, the less downward pressure on the greenback. The deficit in the U.S. balance of payments, which is essentially foreign lending to the U.S., has fallen to $98.8 billion, from a peak of $214 billion three years ago.

Maintaining a more equitable balance of global trade in the future will not be easy. Export intensive nations, such as China, must boost their domestic demand, while the U.S must control its appetite for imports, while exporting more. However, old habits die hard.

Heres the weekly calendar, from Action Economics.