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Daily Global Commentary

Surprise Narrowing of Trade Deficit in May

Sun, Jul 13 2008, 21:32 GMT
by Paul Kasriel

Northern Trust

Surprise Narrowing of Trade Deficit in May

The trade deficit narrowed to $59.8 billion in May from $60.5 billion in April. Exports of goods and services increased 0.9% in May after a 3.7% gain in April. It is widely predicted that exports will continue to make a significant contribution to GDP in the quarters ahead. This view may have to tempered somewhat because latest economic reports from abroad are less sanguine than have been in recent months. Economic reports from the European Union are a case in point. Inflation adjusted exports of goods moved up 0.7%, which is a smaller increase compared with the gains seen in three out of the four months ended April.

Imports of goods and services rose 0.3%, but inflation adjusted imports of goods dropped 1.8%. Imports of petroleum fell sharply to $9.8 billion form $10.9 billion in April. The sharp increase in the price of crude oil has translated to fewer barrels being imported per day (9,484 barrels per day in May vs. 10,102 barrels in April). The trade deficit vis-à-vis China widened to $21.0 billion from $20.2 billion in April. However, the trade deficit vis-à-vis Mexico, Japan, Canada, and the EU was smaller than in April.

In terms of the impact on GDP, the inflation adjusted trade deficit of goods was nearly $90 billion in the April-May period compared with a $102 billion in the first two months of the first quarter, suggesting that trade will have a positive influence on the second quarter GDP.

Import Prices Continue to Present A Problem

Prices of imported goods continued to advance in June, which is problematic for the Fed. The import price index rose 2.6% in June, reflecting higher prices for petroleum and non-petroleum imports. The price index of petroleum imports moved up 7.4% in June, putting the quarterly gain to 24.4%. On a year-to-year basis, the import price index has risen 20.5% in June. Import prices excluding fuel rose 0.8% in June, with the year-to-year gain at 6.6%.

Consumer Sentiment Remains Close to Cycle Low in July

The University of Michigan Consumer Sentiment Index was reported as 56.6 in the early-July survey, virtually unchanged from the previous month. Similar weak readings were last seen in May 1980. The Current Economic Conditions Index moved up to 69.5 from 67.6 in June. The Expectations Index fell to 48.2 from 49.2 in June, the lowest since April 1980. A gloomy consumer is not surprising in an environment of sharp oil prices gains, rising food prices, a financial market turmoil, and geopolitical conflicts.

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Published on  Sun, Jul 13 2008, 21:37 GMT

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