A minor little point about the just announced fall in the US trade deficit and Apple's part in it. It's a small part to be sure but it is there and it shows one of the problems we've got in measuring the trade balance. Arguably, with Apple's products, we do this the wrong way and we can use this month's fall in that trade deficit to show why.
Reflecting an increase in exports and a decrease in imports, the Commerce Department released a report on Friday showing that the U.S. trade deficit narrowed by more than expected in the month of June.
The report said the trade deficit narrowed to $43.6 billion in June from $46.4 billion in May. Economists had expected the deficit to narrow to $45.0 billion.
As I've repeatedly said this whole trade deficit thing just doesn't matter at all. It is, by definition, balanced by a capital account surplus and thus just doesn't mean anything much for the economy as a whole at all.
The U.S. still imports more goods and services than it exports, and the broader trend shows a widening deficit. Through the first half of this year, the trade gap widened 10.7% compared to the same period a year earlier. Exports have risen 6% this year while imports have grown 6.9%.
The capital account surplus has thus grown as well therefore. But it's this little detail that interests:
Overall imports slipped 0.2 percent to $238 billion on a drop in demand for cellphones and other household goods.
Hmm, so, what do we know about what's going on over at Apple? They're preparing and gearing up for what we assume they will call the iPhone 8. And we also know what happens in the month or two before the expected drop of a new iPhone model, sales of the extant ones slow considerably. And yes, Apple's sales are large enough to register at this economy wide level.
Apple today announced financial results for its fiscal 2016 fourth quarter ended September 24, 2016. The Company posted quarterly revenue of $46.9 billion and quarterly net income of $9 billion, or $1.67 per diluted share. These results compare to revenue of $51.5 billion and net income of $11.1 billion, or $1.96 per diluted share, in the year-ago quarter. Gross margin was 38 percent compared to 39.9 percent in the year-ago quarter. International sales accounted for 62 percent of the quarter’s revenue.
That's some $6 billion a month in US sales (includes Canada but what the heck) which is 2.5% or so of all imports. Yes, a slow down in Apple sales is indeed--without making any claims at all that Apple's sales have slowed that much, this is just to note that we're potentially in the right orders of magnitude here--significant enough to change the trade deficit numbers.
However, here is our problem. We're not measuring the effect of those iPhone imports properly. In the trade numbers, for goods, the value of them is described as the product of China. Which really doesn't add much of the value at all, those assembly plants add $10 each or something. The true value is in the making of the components plus the profit margin that Apple adds. Of which perhaps the largest one single component is the gross margin that Apple adds. Now, that, for sales in the US, is recorded as being part of US GDP and that's absolutely fine. But, crucially for my point here, that gross margin being added on the other 60% of Apple's sales overseas is not being recorded as an export. But it obviously is an export from the US, but the vagaries of trade accounting means that it isn't recorded as one. Again, yes, Apple is large enough that this does swing the national trade numbers.
To any reasonable real world approximation Apple's 40% margin on global iPhone sales is an export from the US. We don't though include it in our calculation of the trade deficit thus we overstate that very trade deficit.
