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Vital Signs: Wider Trade Gap Could Hurt Growth


On deck: ISM nonmanufacturing, consumer credit, wholesale trade, exports and imports, and job openings and labor turnover

This week and next, economists will be getting two key pieces of data that will help to hone their projections for third-quarter growth in real gross domestic product: the August report on the trade balance this week and August numbers on business inventories next week. Both often play big roles in the quarter-to-quarter swings in GDP growth.

For this week, the attention will be on Friday’s update on exports and imports. The July trade deficit widened much more than analysts had expected, suggesting foreign trade might subtract about 0.5 percentage points from third-quarter growth. If the August gap widens further, the drag on growth would be even larger. Right now, economists surveyed by Action Economics expect both exports and imports to increase slightly, resulting in an August deficit close to the $32-billion gap recorded in July.

The trade deficit has narrowed sharply in recent years, mainly because the U.S. recession has had a greater impact on imports than the global downturn had on exports. Since the recession began, inflation-adjusted exports and imports have declined $208 billion and $440 billion, respectively. As a result, the trade gap has narrowed to 2.4% of GDP in the second quarter, the lowest level in a decade and down from a record high of 6% three years ago.

As the recovery develops, trade is expected to be a more neutral factor in U.S. growth than in past recoveries. Typically, the trade deficit has widened sharply in an upturn, as the U.S. picked up steam in advance of other economies, causing imports to run ahead of exports. This time, the initial global thrust came from Asia, which already has helped to lift exports. Now, as global stimulus efforts kick in and as the world’s financial markets heal, Asia, the Americas, and Europe are all accelerating together in a synchronized global rebound that will benefit U.S. exports even more. At the same time, if the recovery in U.S. demand is as mild as expected, import growth will be restrained, and the trade gap will not widen as sharply as it has in past recoveries.

The global recovery is already boosting exports. Since January, exports to Asia, excluding Japan, have accounted for almost half of total shipments, and in the three months through July, the growth rate for shipments of all goods, adjusted for inflation, accelerated to a 30% annual rate. Exports of industrial materials and capital goods account for most of the recent growth. The September index of export orders from the Institute for Supply Management remained a high level, consistent with solid export growth.

A weaker dollar will also add support to exports. The greenback’s 26% slide against all currencies from 2002 to 2008 has helped to make U.S. goods more competitive in foreign markets. After strengthening late last year in a global flight to safety after the Lehman Brothers failure, the dollar has since retreated substantially over the past seven months, but fears of a dollar collapse are greatly exaggerated. One reason: the shrinkage in the trade deficit has cut America’s need for foreign capital by 56% since 2006. In the long run, the less the U.S. needs to borrow, the less downward pressure on the dollar.

Here’s the weekly calendar, from Action Economics.

Top Economic Reports

Report

Date

Time

For

Median Estimate

Last Period

ISM index (Nonmanufacutring)

Monday, Oct. 5

10:00 a.m.

September

50.0

48.4

Consumer Credit ($Billions)

Wednesday, Oct. 7

3:00 p.m.

August

-$7.0

-$21.6

Wholesale Trade Sales

Thursday, Oct. 8

10:00 a.m.

August

0.3%

0.5%

Trade Balance ($Billions)

Friday, Oct. 9

8:30 a.m.

August

-$32.0

-$32.0

Goods & Services Exports ($Billions)

Friday, Oct. 9

8:30 a.m.

August

$128.3

$127.6

Goods & Services Imports ($Billions)

Friday, Oct. 9

8:30 a.m.

August

$160.3

$159.6

Other Reports and Events

Report/ Event

Date

Time

For

SPEECH: New York Fed President Dudley

Monday, Oct. 5

6:30 p.m.

ICSC-UBS Store Sales

Tuesday, Oct. 6

7:45 a.m.

Sep. 27-Oct. 3

Johnson Redbook Weekly Store Sales

Tuesday, Oct. 6

8:55 a.m.

Sep. 27-Oct. 3

SPEECH: Kansas City Fed President Hoenig

Tuesday, Oct. 6

9:45 a.m.

Mortgage Applications

Wednesday, Oct. 7

7:00 a.m.

Sep. 27-Oct. 3

SPEECH: Kansas City Fed President Hoenig

Wednesday, Oct. 7

8:45 a.m.

Initial Unemployment Claims

Thursday, Oct. 8

8:30 a.m.

Sep. 27-Oct. 3

Job Openings and Labor Turnover

Friday, Oct. 9

10:00 a.m.

August


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