Record US Trade Deficit Casts Doubt on Growth

The August trade deficit hit $69.9bn,
equivalent to an annual rate of nearly $840bn

KRISHNA GUHA / Financial Times (UK) 12oct2006

[Dept. of Commerce Report 475Kb PDF]

Washington — The US trade deficit hit a record high for the second successive month in August, accentuating concerns about global imbalances and raising fresh doubts about the strength of US third quarter growth.

Economists were on Thursday revising down their estimates of growth in the quarter, which some now expect will fall below 2 per cent.

Meanwhile, the Federal Reserve issued its latest beige book, which suggested that consumer spending firmed in September and early October, but characterised growth overall as “moderate or mixed.”

It said “nearly all districts reported that housing market conditions continued to soften” with rising inventors and additional incentives for buyers.

There was little anecdotal evidence to support the notion – advanced by some Fed officials - that housing activity may already be close to its trough.

The beige book reported that “the majority of districts characterised price pressures as contained.”

Labour market conditions were described as “taut” with skilled workers in short supply in some areas. Some regions faced shortages of professional, scientific and technical workers, for example.

Wage growth was “generally modest”.

The vast services sector “generally strengthened across districts since the last report,” the Beige Book said, while manufacturing activity remained “generally strong.”

The somewhat dovish tone is consistent with the Fed remaining on hold for an extended period as it seeks to verify that inflation is easing as expected.

The August trade deficit hit $69.9bn, equivalent to an annual rate of nearly $840bn, figures released yesterday by the Department of Commerce showed.

Part of the increase was driven by oil prices, which continued to rise in August before falling sharply into September.

However, the volume of oil imported also rose, and imports more generally were strong.

Exports remained healthy, growing at 2.3 per cent in August against 2.4 per cent for imports, but with imports starting from a much larger base, the net effect was a widening deficit.

Haseeb Ahmed, an economist at JP Morgan, said “it was a bit of a surprise, in the sense that imports were much stronger than the market was expecting.” He said this boded well for inventories, which should partly offset the drag on growth.

JP Morgan still looks to a recovery in net trade to support US growth next year.

Most economists predicted a rapid turnaround in trade in the current quarter due to lower oil and other commodity prices, which would in turn boost fourth quarter growth.

“The narrowing of the nominal trade deficit will be substantial this quarter,” said Peter Kretzmer, an economist at Bank of America Securities.

However, continued strength in US consumption could slow the longer term adjustment.

U.S. Trade Deficit Hit Record
In August Amid High Oil Prices

ELIZABETH PRICE and JEFF BATER / Wall Street Journal 12oct2006

WASHINGTON — The U.S. trade deficit unexpectedly rose to a record in August, inflated by high oil prices and American demand for all types of imports.

The U.S. deficit in international trade of goods and services climbed 2.7% to $69.86 billion from $68.00 billion in July, the Commerce Department said Thursday. July's shortfall was previously estimated at $68.04 billion.

The August trade deficit surprised Wall Street economists, who had predicted stronger exports would bring a decline. The median estimate of 21 economists surveyed by Dow Jones Newswires was for a deficit of $66.80 billion.

After an unusual drop in July, U.S. exports rose 2.3% to a record $122.42 billion in August, pushed higher by strong sales of American-made aircraft, foods, and consumer goods.

Exports of U.S. farm products rose $365 million. Exports of consumer goods, like artwork, stamps, toys and cosmetics, were up $236 million. Sales of capital goods, including aircraft, drilling equipment, and machines, rose $1.3 billion. Foreign shipments of industrial supplies rose $488 million. Exports of autos and parts fell $136 million.

Growth of U.S. imports outpaced exports, rising 2.4% in August to $192.28 billion. The nation's energy bill accounted for much of the increase, amid higher prices and consumption. The U.S. consumed 343.49 million barrels of crude in August, up from 321.58 million in July. Meanwhile, the average price of a barrel of crude rose $1.28 to an all-time high of $66.12. Imports of all energy-related petroleum products rose to $30.50 billion from July's $28.44 billion.

Economists note that oil prices peaked in August and should contribute to falling imports and a lower trade deficit in September and October. Still, demand for imports in August was broad-based, with increases posted for all major categories. The U.S. imported record highs of foreign-made foods, industrial materials, big-ticket capital goods and consumer goods.

Purchases of industrial materials, including crude oil, natural gas, metals and chemicals rose $2.0 billion. Imports of capital goods, like telecommunications equipment, semiconductors and computers were up $963 million. Imports of cars and parts made abroad rose $522 million, while imports of consumer goods like toys, shoes, and clothes rose $678 million.

Deficits with major trading partners were mostly higher in August. The deficit with China — the largest bilateral trade shortfall — rose to a record $21.96 billion in August. The deficit with Organization of Petroleum Exporting Countries also hit a record high $11.23 billion.

The monthly shortfall with Mexico increased to $6.23 billion, also a record high. The trade gap with Canada increased to $6.08 billion and the deficit with Japan eased slightly to $7.47 billion. The trade gap with the euro area fell to $8.94 billion from $10.34 billion.

Jobless Claims Increase

The number of new applicants for unemployment insurance increased slightly last week but remained in its recent range, consistent with moderate growth in payrolls.

Initial jobless claims rose 4,000 to a seasonally adjusted 308,000 in the week ended Oct. 7, the Labor Department said Thursday. New claims for the week ended Sept. 30 were revised up to 304,000 from a previously reported 302,000. There were no special factors in the latest week, the Labor Department said.

The latest figures were slightly better than expected. The median estimate of 16 economists surveyed by Dow Jones Newswires and CNBC had signaled jobless claims would be up 10,000 last week. The four-week average of new claims, which economists look to as a gauge of underlying labor market strength, dipped by 750 last week to 313,250.

The claims figures suggest that while labor market conditions have slowed compared to the beginning of the year, moderate job gains and low unemployment should provide ongoing support to consumer spending and offset some of the drag from a weak housing sector. Under that scenario, it is likely that the Federal Reserve would keep rates steady at its Oct. 24-25 meeting.

Thursday's report shows the number of workers drawing unemployment benefits for more than a week rose in the week ended Sept. 30, the latest week for which such data are available. These continuing jobless claims increased 5,000 to 2,445,000. In the week ended Sept. 30, the jobless rate for workers with unemployment insurance was 1.9%, unchanged from the previous week.

During the same week, a total of 24 states and territories reported an increase in unadjusted claims, while 29 reported a decrease. Kentucky reported the biggest increase, 3,010, citing layoffs in automobile and manufacturing. Michigan reported the biggest decline in claims, 12,540, citing fewer layoffs in the automobile industry.

—Brian Blackstone contributed to this article.

Widening Trade Deficit
Set To Drag on Third-Quarter GDP

Wall Street Journal 12oct2006

The U.S. trade deficit widened 2.7% in August to a record $69.86 billion from $68 billion in July, the Commerce Department said. The median estimate of 21 economists, who expected surging exports would lead to a decline, was for a deficit of $66.8 billion. Exports bounced back in August, rising 2.3% following a drop in July. However, they were outpaced by imports, which were inflated by high oil prices amid a broad-based demand for foreign goods. Economists weigh in on what the larger-than-expected number means for third-quarter GDP and beyond.

* * *

The trade balance has deteriorated sharply over the past two months. The recent decline in energy prices had not yet shown up in this data; consequently, there should be a sharp decline in oil prices, oil imports, and total imports next month. However, the non-petroleum trade deficit has also been deteriorating, albeit more slowly than the total trade shortfall. The real goods trade deficit in July and August has widened substantially compared to its second-quarter average, suggesting that net exports will subtract moderately from third-quarter GDP, which we now estimate at just 1.5%. --Steven Wood, Insight Economics

* * *

It takes a month or so for lower oil prices to hit the trade data, and the really big drop did not come until September. Ex-petroleum and aircraft, the core August deficit rose a less dramatic $800 million. Core exports jumped 3.3% but this was more than offset by a 2.8% increase in core imports. Remember that the level of imports is so high relative to exports that they do not need to rise as quickly in order to lift the nominal dollar deficit. In September, a surge in aircraft exports will reduce the deficit by perhaps $2 billion, but net trade will still be a drag of about 0.8 percentage point on third-quarter GDP growth. --Ian Shepherson, High Frequency Economics

* * *

While the sharp rise in the August deficit is a little disconcerting, this should be the high water mark for the deficit this year. Recent sharp declines in crude oil prices finally will flow through to import contract prices in September. The volume of crude oil and petroleum product imports should ease back due to the recent strong build up in inventories. These prospective developments on the petroleum trade situation should provide substantial relief to the trade deficit in September and the final quarter of the year. --Brian Bethune, Global Insight

* * *

With export growth probably stronger than generally expected in August, the blame for the much wider than expected deficit falls squarely on the shoulders of the unexpected surge in imports, which was broad-based… The fact that both imports and exports grew strongly tends to be a sign of global economic strength rather than weakness… Based on July and August, the net export sector looks like it will be a negative in terms of overall real GDP growth in the third quarter, maybe to the tune of about 0.8 percentage point. --Joshua Shapiro, MFR, Inc.

* * *

The drop in oil prices in September and forward will be all the larger given the higher base set in August, and volumes will undoubtedly return to a more normal level in September. Thus, this miss may be less damaging to third-quarter GDP than it would first appear, and anything we lose in third quarter may be recovered in the fourth. --Stephen Stanley, RBS Greenwich Capital

* * *

While the wider trade deficit implies some downgrading of GDP growth estimates, the data also imply that capital spending growth in the U.S. and abroad remains strong. In addition, about 40% of the increase in the deficit was price related, so the impact on "real" GDP estimates will not be as severe as the headlines imply. Nonetheless, the trade figures will probably force some further reductions in third-quarter GDP growth estimates. --Nomura Economics Research

* * *

Trade is set to subtract more from third-quarter GDP growth than we expected. The accrued trade drag of 0.8 percentage points through the first two months of the quarter suggests we should pare our estimate of third-quarter growth to around 3% (although we get important data tomorrow in the form of retail sales). However, from an economic perspective, the strength of import and export flows underscores the robustness of demand growth in the U.S. and overseas. From a monetary theory of the balance of payments perspective, the widening trade gap continues to suggest that U.S. monetary policy is accommodative. --Bear Stearns Economics

* * *

The ballooning trade deficit will tax third-quarter growth by about two-tenths of a percentage point. Longer term, the trade deficit substantially slows investments in research and development, education and training, and the multiplier effects on U.S. growth are disturbingly larger… Americans borrow about $60 billion each month to consume more than they produce. The total debt will exceed $6 trillion by early 2007. --Peter Morici, University of Maryland

--Compiled by Phil Izzo