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Trade deficit could have risen in April, partly due to higher import prices

Mon, Jun 9 2008, 09:21 GMT
by BHF-Bank Economics Department

BHF-Bank

• Sharp rise in import and consumer prices in May will have been mainly due to energy

• High gasoline prices will have supported otherwise weak retail sales in May

Pending home sales fell by 1.0% mom in March – a new cyclical low and 35% below the peak in April 2005. Partly due to the increase in foreclosures, we expect pending home sales to have continued declining in April, by about 1.0% mom. According to the Mortgage Bankers Association, the share of mortgages entering foreclosure reached record highs in the first quarter, and this trend will probably have continued in April.

After having widened unexpectedly in February, the US trade deficit narrowed again to –$58.2bn in March. Both exports and imports declined by 1.7% and 2.9% mom respectively. But as import prices increased by 1.8% mom, nominal imports are likely to have risen noticeably again. We thus expect the trade deficit to have widened to $60bn in April.

The Congressional Budget Office (CBO) estimates that the May budget deficit will have reached $165bn this year, $97bn more than last year. About half of the increase will have been due to the tax rebates, and calendar effects will have raised outlays as well, as 1 June fell on a weekend and payments were thus shifted into May. The total deficit after the first eight months of the current fiscal year could have reached $317bn – more than twice as high as in the same period of the last fiscal year.

Import prices rose by 1.8% mom in April, driven mainly by higher petroleum prices. However, import prices ex petroleum also went up markedly by 1.1% mom, due to a surge in food and natural gas prices. Crude oil prices increased further by about 13% mom in the first third of May, which is the statistically relevant period. Thus import prices could have risen by 2.2% mom and 16.9% yoy in May. Consumer prices (CPI) increased by a mere 0.2% mom in April, as a sharp rise in gasoline prices was incorporated into the seasonal adjustment process. We forecast that CPI will have gone up by 0.4% mom (3.8% yoy) in May. Average gasoline prices jumped by almost 9% mom, but more than half of the increase will have been evened out by the seasonal factors. This means, however, that even if gasoline prices were to remain stable in the second half of the year, they would still raise the CPI level markedly, as the regular seasonal pattern assumes sharp declines. Core CPI could have risen again by 0.2% mom, leaving the annual rate at 2.3%.

The sharp rise in gasoline prices will have had a positive impact on nominal retail sales, and we expect them to have risen by 0.4% mom in May. Excluding autos, retail sales could have gone up by 0.5% mom, as domestic vehicle sales fell further. Real sales will probably have dropped, in line with the plunge in consumer confidence indicators.

Initial jobless claims, which have been very volatile for some weeks, fell by 18k to 357k in the week ending 31 May. However, at 368.5k, the 4-week moving average is noticeably higher. We expect jobless claims to have increased again to about 380k in the week ending 7 June, as the previous week’s decline was probably connected with the Memorial Day holiday.

We already know that factory inventories were only flat, but wholesale inventories jumped by 1.3% mom in April. Total business inventories might thus have risen by 0.5% mom in April, as higher prices could have had a positive impact on retail inventories too.

The University of Michigan’s (UMI) final May consumer sentiment was revised upwards from 59.5 to 59.8. But the preliminary UMI consumer sentiment could at best remain stable, despite the latest weekly ABC consumer comfort index having gone up from –51 to –45, possibly due to the tax rebates. However, gasoline prices continued to increase at the beginning of the month, and the significant rise in the May unemployment rate from 5.0 to 5.5 % is likely to be weighing on consumers.

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Published on  Mon, Jun 9 2008, 09:35 GMT