KEY DATA: Deficit: $40.3 billion ($3.2 billion wider); Imports: up 2.4%; Exports: up 1.2%
IN A NUTSHELL: “The economy is improving so it should surprise no one that the we are importing more and the trade deficit is widening.”
WHAT IT MEANS: As we celebrate the economic recovery by worrying about when the Fed will ease off the accelerator, there are other ramifications of that better growth that must be considered. One is inevitable widening in the trade deficit. The U.S. economy may not be robust but with growth continuing, the demand for foreign goods is picking up. Imports jumped in April and it was not for petroleum products. Indeed, the weaning of the U.S. economy off of foreign oil is moving forward. For the first four months of the year, adjusting for prices, oil imports are off almost ten percent. But we are buying lots of other goods from around the world. Demand for capital goods, motor vehicles and consumer products jumped. U.S. exporters are doing their best to sell around the world and they are having some success. But weak food shipments held back our export growth. In addition, the Chinese economic slowdown led to a large reduction in sales to that country. Not surprisingly, China sent a lot more to the U.S. and our deficit with that country widened sharply. You can be sure of one thing, when countries around the world have economic issues, they pump up their sales to the U.S.
MARKETS AND FED POLICY IMPLICATIONS: The widening trade deficit contains the usual good news and bad news. The good is that the U.S. economy continues to improve so our imports are rising. The bad is that a widening trade deficit means slower economic growth. Right now, it looks like trade will be a neutral but that might not be the ultimate result. As long as we remain the market of last resort, we will need strong foreign economies to buy our products if we are to keep the deficit from becoming a chasm again and that just is not the case right now. The one good trend is the lessening our foreign energy needs, which in the past was a prime mover of the deficit. How will investors see this report? It’s Tuesday and that doesn’t mean its Belgium, it means the markets go up. As for the Fed, I really don’t know how the battle between those who want to taper because of inflation fears and those who are concerned first and foremost about economy growth will play out. But a widening trade deficit, if it slows growth, should give at least some pause to the inflation hawks. Actually, I doubt it will since they are not looking at the short term but well down the road. More important is Friday’s jobs report, since that is where the rubber really meets the road.