Bloomberg News

Widening Trade Gap Signals Improving U.S. Demand: Economy

September 04, 2013

Trade Gap in U.S. Widened in July From Almost Four-Year Low

An employee welds a Bangladesh 3870 cutter basket in the fabrication area at the Ellicott Dredges LLC manufacturing facility in Baltimore. Data from last week showed orders for durable goods dropped in July by the most in almost a year. Photographer: Andrew Harrer/Bloomberg

The trade deficit in the U.S. widened in July from an almost four-year low as Americans imported more fuel and automobiles, showing the world’s largest economy is picking up.

The gap increased 13.3 percent to $39.1 billion from $34.5 billion in June that was the smallest since October 2009, the Commerce Department reported today in Washington. Purchases from abroad climbed 1.6 percent, while sales of American goods to foreign buyers cooled to the second-highest on record.

Imports will probably keep rising, reflecting improving demand and a jump in crude-oil prices as tensions mount in the Middle East. At the same time, a strengthening U.S. expansion is helping companies in the European Union and China boost sales, which will stabilize global growth and, in turn, improve prospects for American exports.

“We’re going to see more widening in August,” said Joshua Dennerlein, an economist at Bank of America Corp. in New York, who correctly forecast the trade balance. “Part of that reflects a pickup in domestic demand,” he said, and in addition, “we’ve had the conflict in Syria escalate and that’s putting upward pressure on oil prices.”

Stocks rose, led by automakers and technology companies. The Standard & Poor’s 500 Index climbed 0.8 percent to 1,653.08 at the close in New York.

Beige Book

The Federal Reserve said today that Americans spending more on cars and housing helped the economy maintain a “modest to moderate” pace of expansion from early July through late August, even as borrowing costs increased.

Manufacturing expanded “modestly” and consumers spent more on travel and tourism, the Fed said in its Beige Book business survey, which is based on anecdotal reports from its 12 districts. Hiring “held steady or increased modestly.”

Reports this week indicate global growth is gaining momentum. U.K. service companies unexpectedly grew at a faster pace last month as companies reported a surge in demand, helping Britain sustain its pace of recovery, according to figures issued today from Markit and the Chartered Institute of Purchasing and Supply.

Earlier this week, a U.K. factory index increased in August to a more than two-year high, while a pickup in Italy and Spain helped euro-area manufacturing expand faster than initially estimated. China’s manufacturing also strengthened in August, with one index posting its biggest jump in three years, as improving demand abroad and at home underpins its recovery.

Economists’ Forecasts

The median forecast in a Bloomberg survey of 72 economists projected the trade deficit would grow to $38.6 billion. Estimates ranged from shortfalls of $34.8 billion to $42.5 billion. The Commerce Department initially reported a $34.2 billion June gap.

The jump in the trade shortfall in July was the biggest since January 2011 and followed a 21 percent contraction the prior month, suggesting the trend is somewhere between the two. The July and June readings were the smallest back-to-back since late 2009.

Imports climbed 1.6 percent to $228.6 billion in July. The U.S. bought $32.5 billion worth of petroleum-related products from abroad, the most since October. The price of crude oil on the New York Mercantile Exchange reached $110.10 on Aug. 28, a two-year high, amid growing concern there will be an American-led military strike against Syria.

Motor Vehicles

Purchases of foreign autos, parts and engines rose to a record $26.5 billion, today’s report showed. General Motors Co., Toyota Motor Corp. and Ford Motor Co. today reported U.S. sales gains for August that exceeded estimates as analysts projected the best month for industry demand in six years. Demand for cars and light trucks rose 15 percent for GM, 23 percent for Toyota and 12 percent for Ford, according to company statements.

Today’s U.S. trade figures also showed exports decreased 0.6 percent to $189.4 billion after jumping 2.2 percent in June to a record $190.5 billion. The cooling reflected fewer purchases of capital goods, including airplanes and engines, and of consumer items such as jewelry.

After eliminating the influence of price changes, the trade deficit widened to $47.7 billion from $43.8 billion in June. The reading for July matched the second-quarter average, indicating trade is so far having little influence on third-quarter gross domestic product.

The economy expanded more than estimated in the second quarter, with GDP increasing at a 2.5 percent annualized rate, up from an initial estimate of 1.7 percent, the Commerce Department said Aug. 29. The trade deficit in the second quarter was smaller than previously estimated, reflecting the biggest gain in exports in more than two years.

Factory Orders

Other data this week have pointed to an improving economy. American factories received more orders in August, unexpectedly sending the Institute for Supply Management’s manufacturing index last month to a two-year high. The group’s export index was the strongest in five months, while the import gauge climbed to the highest point since April 2010.

“We do expect a small pickup in GDP growth in the second half of this year,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York, and the top-ranked trade forecaster over the last two years, according to data compiled by Bloomberg. “It’s unlikely that GDP growth will accelerate without a substantial pickup in consumer spending, and that has implications for trade as well.”

China Balance

The trade gap with China, the world’s second-biggest economy, widened to a record $30.1 billion from $26.6 billion, today’s report showed. The deficit with the European Union was also the biggest ever with the region, reaching $13.9 billion.

Global GDP is projected to pick up speed in the second half of the year, with growth reaching 2.6 percent on a year-to-year basis in the fourth quarter from 2.1 percent in the second quarter, according to the median forecast of economists surveyed by Bloomberg. That may help companies, including machinery manufacturer Deere & Co. (DE:US), which reported the slowest quarterly sales growth since 2010 in the third quarter ended July.

The Moline, Illinois-based company expects its global forestry markets to be up as much as 10 percent this year, “as weakness in Europe and Russia is more than offset by improvement in North America,” Susan Karlix, manager of investor communications, said on an Aug. 14 conference call. While the company faces headwinds including a sluggish global economy and political gridlock in Washington, the longer-term picture “remains extremely bright,” she said.

To contact the reporter on this story: Victoria Stilwell in Washington at vstilwell1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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