Tags: trade | deficit | us | economy

Narrowing Trade Deficit Is Rare Good News for Economy

Wednesday, 11 Jul 2012 10:07 AM

INDICATOR: May Trade Deficit

KEY DATA: Deficit: $48.7 billion ($1.9 billion narrower); Exports: up 0.2 percent; Imports: down 0.7 percent

IN A NUTSHELL: “The narrowing trade deficit is good for the economy especially with exports rising.”

WHAT IT MEANS: One of the major concerns about growth has centered on the weakening world economy and the fear that our exports would fall.

At least in May, that was not the case. Exports rose, led by strong increases in sales of capital goods and agricultural products. Vehicle and consumer goods sales eased, but not sharply.

There was a large decline in nonmonetary gold that really pulled down the numbers but that doesn’t worry me a whole lot. Looking where we sold our goods, the news was pretty good.

Demand for U.S. products was up in Europe and Asia, parts of the world where economic weakness was (and still is) expected to hurt exports.

On the import side, the decline was a bit misleading as much of it was in a reduction in petroleum which was driven in part by a decline in prices.

There was also a drop in our purchases of consumer goods, especially apparel and cell phones. However, capital goods and vehicle imports rose pointing to continued strength in the economy.

Looking at the trade deficit with other countries, despite the rise in sales to China, we imported a lot more and the deficit continued to expand.

Similarly, our trade deficit with Europe widened, reflecting the stronger U.S. economy which continues to require more and more products from everywhere.

MARKETS AND FED POLICY IMPLICATIONS: It is always nice to see the trade deficit narrow but I am not sure this will continue. The sharp decline in oil prices has faded and the economies in Europe and Asia have weakened further. Thus, it is likely our exports are not likely to grow a whole lot going forward and indeed they will probably decline.

Meanwhile, as long as the U.S. economy continues to expand, so will imports. Thus, look for the deficits to widen during the second half of the year and that will slow growth. The restraining effects of wider deficits were forecast but it is still unclear how big a drag they will be on growth.

The May numbers don’t point to a large problem but that could easily change as the slowdown in Europe should get worse before it starts to get better. Investors will probably like this report as anything that says growth could be better than feared is helpful.

The U.S. economy continues to expand but in this global economy we cannot do it alone. No amount of Federal Reserve additional liquidity will change that. Thus, don’t expect the Fed to do a whole lot more than continue to drive down mortgage rates. If you haven’t refinanced lately, it may be time to seriously consider looking into doing that.

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Wednesday, 11 Jul 2012 10:07 AM
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