July trade in intangibles

For the second straight month the US trade deficit fell slightly according this morning's BEA trade data. But the surplus in intangibles went in the wrong direction.

The overall trade deficit declined in July by $183 million to $59.2 billion after dropping by $186 million in June (revised figures) as, once again, exports grew faster than imports. Exports were up by $3.6 billion, due to increases in farm products, capital goods, auto, and consumer goods. [But while capital and consumer good exports were up, advanced technology exports declined - leaving one to wonder about a situation were exports of civilian aircraft are up but exports of aerospace technology are down and exports of computers, computer accessories and telecommunications equipment are up but exports of electronics and information and communications technologies are down.] Imports also rose by $3.4 billion. As the Wall Street Journal noted:

The July trade gap came was in line with Wall Street expectations. Economists surveyed by Dow Jones Newswires ahead of the report had predicted a $59.20 billion deficit. Demand abroad for American-made products has been an important contributor to U.S. economic activity this year and Tuesday's report indicated that trend continued into the third quarter.

Economists believe the trade balance will finally shrink this year after setting five consecutive records as American exporters benefit from strong economic growth in many countries overseas and a weaker dollar against many currencies. That makes U.S. products cheaper on foreign markets and imports more expensive for American consumers.

Unfortunately, that dynamic doesn't seem to be playing out with respect to intangibles and advanced technology products. Our intangibles surplus declined by $228 million in July to $10.1 billion. A decline in exports of business services combined with an increase in imports of business services and an increase in royalty payments (imports). Receipts (exports) of royalties increased only slightly.

In addition, revised figures for the first six months of 2007 show that our surplus was not at big as first reported, with payments (imports) of royalties revised upward and receipts (exports) of royalties, exports of business services and imports of business services all revised downward.

The deficit in Advanced Technology Products increased dramatically, worsening by over $1.6 billion in July to $4.9 billion. The deficit increase across almost all advanced technology sectors (expect life sciences and slightly in weapons) but was mainly driven by decreased exports in aerospace, biotechnology and information and communications technologies. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.

Just like last month, the generally good news in the overall deficits stands in stark contrast to that of intangibles and advanced technology products. With these key areas moving in the wrong direction, the overall picture is mixed.

Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.

Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.