Trade Gap Widens On Higher Oil Prices; Non-Oil Deficit Shrinks as Exports Improve

Nigel Gault, Chief U.S. Economist for IHS Global Insight weighs in on the June International Trade Balance.

Bottom Line

• The trade gap widened to $27.0 billion in June from $26.0 billion in May. Exports rose 2.0% while imports rose 2.3%.
• The widening came entirely from petroleum; the oil deficit widened by $3.9 billion as oil prices rose.
• But the non-oil deficit narrowed by $2.9 billion; exports improved, but non-oil imports kept falling as U.S. producers and retailers continued to cut inventories.
• Adjusted for inflation, goods exports rose 0.6% and goods imports rose 0.1%.
• Rising exports are a welcome sign that the global economy is turning.
• We expect the trade deficit to widen in the second half of 2009 as U.S. imports should pick up faster than exports when the domestic inventory cycle turns.

Outlook

The trade deficit widened in June, due entirely to oil. Oil imports were much higher in price and also higher in volume than in May. But the non-oil deficit narrowed again. Export volumes rose for the second month in succession (the first back-to-back gains since August 2008), with capital goods and autos moving higher. And import volumes were little changed. While oil import volumes were up, imports of other industrial materials and of consumer goods both fell. That points to continuing efforts by U.S. producers and retailers to keep their inventories lean.

The trade deficit made a major positive contribution to growth in the first half of the year as imports fell more steeply than exports. In the second half of the year, we would expect to see imports pick up more than exports, as the domestic inventory cycle turns. As a result, the trade deficit should widen and trade will become a drag on growth. But that would be a drag in a context where both exports and imports are growing, as the U.S. and global economies climb out of recession.

Today's figures were better than assumed in the Q2 GDP report and, on their own, would add about a tenth of a point to GDP growth. However, other data already released on construction and inventories point to a downward revision, so as of now we expect Q2 GDP growth to be revised down to -1.6% from -1.0%.

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