Trade Gap Probably Shrank on Cheaper Oil: U.S. Economy Preview

The trade deficit in the U.S. probably narrowed in May as falling crude oil prices and weakening demand helped trim the import bill, economists said before a report this week.

The gap shrank to $48.5 billion from $50.1 billion in April, according to the median forecast of 61 economists in a Bloomberg News survey before a Commerce Department report due July 11. Cheaper energy also helped push down wholesale prices in June for a third consecutive month, another report may show.

A faltering global economy, which led central banks from Europe to China to cut interest rates and announce more stimulus on July 5, may also mean fewer purchases of American-made goods. At the same time, a lack of U.S. hiring that helped prompt the Federal Reserve to ease monetary policy last month may also temper demand for imports.

“The stress lines in the global economy are going to hurt exports,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “U.S. demand is soft. Fed policy makers are nervous.”

American employers added fewer workers to payrolls than forecast in June and the jobless rate stayed at 8.2 percent as the economic outlook dimmed, Labor Department figures showed July 6. The 80,000 gain in employment followed a 77,000 increase in May. The median estimate in a Bloomberg survey of economists called for a 100,000 rise.

A tepid labor market helps explain why Americans are less optimistic. A measure of sentiment from the Thomson Reuters/University of Michigan was little changed in July at 73.5 after a June reading of 73.2 that was the lowest this year, the Bloomberg survey median shows before the group’s preliminary index on July 13.

Fed Program

The Fed last month expanded a program to extend the maturities of assets on its balance sheet and said it stands ready to take further action to put unemployed Americans back to work. Minutes of the central bank’s two-day meeting, to be released on July 11, may shed more light on its decision.

The outlook for exports remains dim. The Bank of England, which announced July 5 that it would restart buying bonds two months after stopping, said output will likely remain sluggish after contracting in the past two quarters. The European Central Bank the same day cut its main rate to a record low as sovereign debt turmoil threatens to drive the 17-nation euro economy into a recession.

Cooling overseas demand is hurting American companies like Harley-Davidson Inc. (HOG) A pickup in the value of the dollar against the euro, which makes U.S.-made goods less attractive to overseas buyers, is also among reasons the biggest U.S. motorcycle maker said first quarter sales fell 1.1 percent.

Debt Crisis

“There is an impact with regards to the events and the debt crisis and consumer confidence and potential recessionary pressures in Europe on our business there,” John Olin, chief financial officer, said on a June 26 conference call. In addition, “we are seeing the pressures of a devaluing currency” as “ everything that we send to Europe is made here” in the U.S., he said.

China, the world’s second-biggest economy, is also stepping up efforts to reverse a slowdown in growth as Europe’s turmoil limits exports and domestic property restrictions curb its housing market. The Asian nation on July 5 reduced benchmark interest rates for the second time in a month.

Slowing global demand has limited shares of equipment makers. The Standard & Poor’s Supercomposite Machinery Index (S15MACH), which includes companies like Caterpillar Inc. (CAT) and Deere & Co., dropped 11 percent in the two months ended June 29, while the broader S&P 500 (SPX) index fell 2.6 percent.

Oil Retreats

Retreating oil prices probably kept a lid on the value of U.S. imports and inflation in May and June. Brent crude traded on the ICE Futures Europe exchange in London declined to $98.19 a barrel on July 6, down from a high this year of $126.22 on March 13.

Cheaper energy expenses are flowing through the economy, Labor Department figures may show. The import price index, due on July 12, fell 1.8 percent after a 1 percent decline the prior month, the Bloomberg survey projected. The producer price gauge, to be released the next day, decreased 0.4 percent following a 1 percent drop, economists predicted.

                        Bloomberg Survey

================================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
Cons. Credit $ Blns       7/9       May       6.5       8.0
Trade Balance $ Blns      7/11      May      -50.1     -48.5
Whlsale Inv. MOM%         7/11      May       0.6%      0.3%
Initial Claims ,000’s     7/12     7-Jul      374       370
Cont. Claims ,000’s       7/12     30-Jun     3306      3300
Import Prices MOM%        7/12      June     -1.0%     -1.8%
Import Prices YOY%        7/12      June     -0.3%     -1.5%
Federal Budget $ Blns     7/12      June     -43.1     -75.0
PPI  MOM%                 7/13      June     -1.0%     -0.4%
Core PPI MOM%             7/13      June      0.2%      0.2%
PPI  YOY%                 7/13      June      0.7%      0.2%
Core PPI YOY%             7/13      June      2.7%      2.6%
U of Mich Conf. Index     7/13     July P     73.2      73.5
================================================================

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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