May's More Favorable Trade Winds

Once more, the latest U.S. trade deficit blew in under Wall Street forecasts. One likely upshot: sunnier GDP prospects

The recent string of lower-than-expected monthly readings on the U.S. trade deficit continued with the July 12 release of the report for May. The trade gap widened slightly to $63.8 billion on the month, well under economists' median forecast of $64.6 billion. The April deficit was revised lower to $63.3 billion from the $63.4 billion originally reported.

The May trade report generally revealed a stronger-than-expected trajectory for exports of both goods and services, consistent with the pattern of other monthly trade reports this year. The figures left a better outlook for U.S. gross domestic product in the second quarter, and the third quarter as well.

Looking at the key elements of the report, imports rose 1.8% to $182.5 billion in May, thanks to oil-price-related strength in industrial supplies (+7.0%), while the other components were mixed. Given that the oil-led import gain in May contained more of a price jump and less of an increase in volume for petroleum than we had assumed, this has provided a boost to the real (adjusted for inflation) net export outlook.

Exports jumped 2.4% to $118.5 billion on widespread strength, as robust growth in the global economy continues to support solid underlying trends.


  The gap between the U.S. and key trading partners continued to widen. The goods deficit with China increased to $17.7 billion from $17.0 billion in April, while the deficit with the European Union increased to $10.8 billion from $9.4 billion. One notable exception: The goods deficit with Japan decreased to $7.1 billion from $7.8 billion.

Action Economics' estimate for second-quarter gross domestic product, scheduled for release on July 28, has been boosted to 3.5%. Furthermore, our 3.5% third-quarter GDP forecast now faces notable upside risk despite lying well above most market estimates—which mostly still remain in the 2.5%-3.5% range. Net exports should add approximately $34 billion to second-quarter GDP, and we assume a $10 billion-$15 billion contribution in the third quarter as well.

The May trade release also bodes well for another key report. Our forecast for the second-quarter current-account deficit, scheduled for release on Sept. 18, has been lowered to $211 billion, vs. the $208.7 billion gap in the first quarter and the record high quarterly deficit of $223.1 billion in the fourth quarter of 2005.

The U.S. trade accounts may indeed be turning the corner following the post-Katrina "pop" in the various deficit measures through the turn of last year, which may now mark the high point of the current economic cycle.

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