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By Michael Englund and Rick MacDonald Are $50 billion-plus U.S. trade deficits here to stay? It sure looks that way -- at least for a while. Trends in oil prices, the import and export data from the Institute for Supply Management, custom duties, and port data all suggest the deficit will remain at historical highs.
At Action Economics, we expect the trade gap for September to narrow only slightly, to $53.5 billion (a tad below economists' median forecast of $53.6 billion), from August's deficit of $54 billion. The report, scheduled for release Nov. 10, looms large, as considerable uncertainty remains with the September trade figures that could have a big impact on future revisions to third-quarter gross domestic product.
ILL WINDS. Overall, while monthly volatility in the trade-gap figure has been considerable this year, robust import gains since the third quarter of last year reflect the fundamentals of rapid U.S. growth in aggregate demand, which is fueling rapid growth in imports. As long as U.S. aggregate demand continues to grow at a rapid clip, the upward pressure on U.S. deficit figures will remain substantial.
A five-year run of extraordinary dollar strength was unwound in 2002 and 2003, so the dollar is now valued against other major currencies at levels more in line with a balanced trade outlook. This improved competitive environment, combined with rapid growth in the global economy, has allowed a substantial acceleration in exports that should reverse the deterioration in the U.S. trade deficit by yearend. But the turning point in the U.S. trade and current-account deficits remains elusive, as still-lofty energy prices may delay the nominal peak in the U.S. trade gap.
There's also some lingering risk of distortions related to the recent string of hurricanes. Surprisingly wobbly exports in August may have reflected the impact of Hurricane Charley, as past hurricanes have been associated with similar weakness in exports. Given the three hurricanes that hit in September, the month could see further downside before exports bounce back in the fourth quarter.
BET ON IT. The trade report is the last major economic release before the Federal Reserve announces its decision on interest rates, which is expected at 2:15 p.m. ET on Nov. 10 after the policymaking Federal Open Market Committee meets that day. A quarter-percentage-point hike in the Fed funds target rate is a virtual lock.
The key for the markets will be the statement issued after the meeting. We suspect it will be similar to the September statement, though more upbeat on the economy and the labor force, and hence consistent with another hike at the Dec. 14 FOMC gathering. Fed funds futures are now reflecting about an 84% chance of a 2.25% Fed funds rate at yearend. Englund is chief economist and MacDonald global director of investment research and analysis for Action Economics