Tags: Naroff | trade | deficit | narrow

Taking into Account Price Changes, July’s Trade Deficit Widened Quite a Bit

Tuesday, 11 Sep 2012 10:43 AM

INDICATOR: July Trade Deficit

KEY DATA: Deficit: $42.0 billion ($0.1 billion wider); Inflation Adjusted: $2.6 billion wider

IN A NUTSHELL: “The United States is still holding its own when it comes to selling goods overseas, but that may not last that long.”

WHAT IT MEANS: The narrowing trade deficit has helped the economy this year, but it looks like the boost is fading.

The deficit ticked up only touch in July, but that was due to a huge fall in monetary gold and jewelry, which are hardly indicators of anything, and lower oil-related shipments, which was largely a price decline issue.

Meanwhile, we sold more food and capital goods.

What is of real concern is the situation with the European Union. There was a sharp drop in sales to the continent, with declines posted with almost every nation. We send nearly 18 percent of our exports to the European Union, and the economic problems there will be restraining activity for a long time.

On the import side, our demand was also off, but once again, declining prices of oil-related products was the prime factor. Indeed, our demand for petroleum as measured by volume was up in July.

Energy was not the only negative on the import side, as purchases of computers and related products cratered.

On the other hand, we bought more consumer goods, food and vehicles, so it appears that households are holding up their end of the deal.

MARKETS AND FED POLICY IMPLICATIONS: When you take into account price changes, the trade deficit widened quite a bit, as exports are moderating. We started off the quarter at a level that was still below the second-quarter average, but the European recession will likely reduce our overseas sales further.

Since the inflation-adjusted, or “real,” trade balance is what matters when it comes to gross domestic product calculations, I expect that trade might slow growth going forward, especially if U.S. consumers keep buying as they have been.

The rising dollar is also not helping, as it is making our goods less competitive, and as long as Europe remains a major uncertainty, the currency is likely to continue appreciating.

Will the markets react much to this report? I doubt it. The Federal Open Market Committee meets on Wednesday and Thursday and the Federal Reserve’s economic projections will be updated, as well.

The markets are all bulled up about further quantitative easing (QE), as it remains the only game in town when it comes to driving up prices. However, its impact on the real economy is a different story: Banks are not doing much with their liquidity as it is and more will do nothing for lending.

As for the wealth effect of higher equity prices, I don’t think a lot of people are looking at their 401(k)s and celebrating by going out and buying lots of things. My view is that QE does nothing for the economy and the Fed should simply wait until giving the markets more drugs.

Investors look like they are hooked on QE, and the more they get, the harder it will be to wean them off it. It will not be impossible, but the risks will rise with further easing.

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2012-43-11
Tuesday, 11 Sep 2012 10:43 AM
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