Foreign trade takes top billing in an otherwise slow week for economic news. The U.S. trade deficit had narrowed sharply in the second half of 2008 and in early 2009. Over the past year, the trade gap's shrinkage has added, on average, 1.5 percentage points per quarter to overall growth. In that respect, trade has been something of a stabilizer, helping to offset the recession's heavy impact on domestic demand. Now, trade is in the middle of a transition. Improvement in the trade gap appears to have run its course, and trade will most likely become more of a neutral factor in growth over the coming year.
This trend was evident in the monthly data for March and April. The trade deficit widened in both months, even excluding the effect of rising oil imports, and economists expect the May gap to increase a bit further. The major impact on U.S. trade over the past year has been the shrinkage in volume of world trade as a result of the global recession. In particular, the has exerted a special downdraft by creating a shortage of trade finance. The Organization for Economic Cooperation and Development estimates the lack of finance has accounted for about a third of the shrinkage in global trade. Through the first quarter, U.S. exports of goods and services, adjusted for inflation, dropped 11.5%, but imports shrank an even greater 17.2%, resulting in a narrower deficit.
In the coming year, U. S. exports are sure to pick up, as global demand recovers, but so will U.S. imports, as U.S. demand stabilizes and returns to at least modest growth. Many economists are starting to upgrade their forecasts for global growth in the second half, with particular attention to Asia. Economists at J.P. Morgan, for example, say manufacturing output in Asian emerging-market nations is on track for a roughly 30% annualized rate of advance in the second quarter. Since manufacturing accounts for nearly 30% of total value added across the region, they estimate the rebound in industrial production will add about 9 percentage points to the region's GDP growth. And that doesn't account for multiplier effects. U.S. exports to Asia and other emerging market countries account for a big chunk of overall U.S. shipments.
At the same time, if current U.S. forecasts are on target, U.S. imports will not be falling as rapidly and will eventually stabilize. Consumer spending has already stopped falling: After dropping sharply in the second half of last year, it rose at a 1.4% annual rate in the first quarter and appears to have held about steady in the second quarter. Also, U.S. manufacturers are turning increasingly upbeat, according to June business surveys, and corporate confidence in general seems to be recovering, as payroll cuts diminish and steep cost-cutting efforts subside.
On balance, the global recovery appears to be moving from east to west. Asia is picking up solidly, with strong impetus from China. U.S. exporters will benefit from that upturn, even as U.S. policy stimulates a revival in U.S. demand that will help to lift the country out of recession. Finally, stronger U.S. and emerging-market demand will help to improve conditions in Europe, which is widely expected to be the laggard in the global recovery.
Here's the weekly economic calendar, from Action Economics: