The Trade Deficit's June Swoon


By Michael Englund and Rick MacDonald A wide U.S. trade deficit has been accepted as a fact of life by Wall Street for a long time now, as the size of the gap has held steady in the $30 billion to $40 billion range. But the markets were blindsided on Aug. 13 by a surprising surge in the June trade gap, to a record $55.8 billion (economists' median forecast was for $47.0 billion), from a revised total of $46.9 billion in May.

What was behind the jump? It seems that everything that could go wrong with the report did. Both exports and imports contributed to the huge swing, though the 4.3% export drop was more significant than the 3.3% import surge. Exports dropped $4.1 billion, or 4.3% to $92.8 billion. Every goods export component except "other" (miscellaneous items) revealed downside surprises, though weakness was concentrated in capital goods, which saw a hefty 8.9% decline, and autos, which dropped 4.1%.

OIL'S IMPACT. On the other side of the ledger, imports increased by $4.7 billion, or 3.3%, to $148.6 billion. Import strength was concentrated in industrial supplies (up 10%) and capital goods (up 5.3%). Petroleum imports provided upside surprises on two fronts: Volume surged to 14.5 million barrels per day, from 12.8 million in May, and prices rose 1.9% -- despite a fall in observed market prices.

The June trade data have eliminated the expected upward adjustment in second-quarter gross domestic product, and we will now look for a downward nudge in growth to around 2.7%. Indeed, it appears that the aggressive surge in business inventories in May and June was actually fueled by a massive import gain that had a neutral impact on the GDP estimate. The upward GDP adjustment to both imports and inventories could be as high as $18 billion to $21 billion.

Export weakness relative to the Commerce Dept.'s neutral assumption, however, will subtract as much as $17 billion from second-quarter GDP, and this will provide a drag that will more than offset the $5 billion upward adjustments likely in domestic consumption. The official 3.0% second-quarter GDP estimate could be revised to as low as 2.5% to reflect the June trade data.

WORSE TO COME? Action Economics will continue to project a peak in the U.S. trade deficit -- as measured both by the monthly goods and services report and the quarterly current account report -- sometime around the third quarter of 2004. Then, a slow but steady downtrend in U.S. trade deficit figures should ensue as growth in the U.S. economy slows while growth abroad increases.

The huge upside surprise in the June report throws a monkey wrench into our optimism on trade in the fourth quarter and beyond, and we will need to see a turn in the trade numbers to really know when the worst of the trade imbalance is behind us. Englund is chief economist, and MacDonald director of investment research and analysis, for Action Economics


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