U.S. Trade Gap Spikes to Six-Month High

September 10, 2009

The final paragraph of last Friday’s weekly Foreign Exchange Insights essay admonished that “in an economic upturn, the U.S. current account deficit may start to widen again.”  A portent of that potential downside dollar risk factor arrived today in U.S. July trade figures showing the 16.5% larger goods and services deficit than in June despite a second consecutive 2%-plus increase in exports.  Commerce with Europe accounted for 47% of the incrementally higher deficit in July than June, and three-fifths of the bigger deficit versus that region involved countries in the euro area.  China was responsible for 21.3% of the month’s wider merchandise trade deficit, and other countries in the Western Hemisphere were the beneficiaries of 11.1% of the deterioration. 

In a generally synchronized global recovery, an upwardly trending U.S. trade deficit would tend to indicate that the dollar is still not competitive enough (that is, weak enough) to promote the kind of rotation of growth toward net exports in the United States and towards personal consumption in major surplus economies like China and Germany.  Barring such a transformation, a repeated financial market earthquake is quite plausible within the coming decade.  But more months of data will needed to tell if the U.S. trade and current account deficits are in fact again widening in a secular way .  At the cusp of a business cycle, there are particular distortions caused by the inventory cycle.  Many of the depleted inventories are imported.  U.S. imports of goods shot up 5.7% in July after increasing very strongly in June as well.

New U.S. weekly jobless insurance claims fell by 25K in the latest reported week of September 5th, but the four-week moving average of 570K was only 5.4K below the weekly average during the previous eight weeks between June 13 and August 8th.  These new claims, a proxy for the layoff rate, remain far above the 400K line of demarcation that separates a healthy from a sick labor market.  Continuing jobless claims, the outstanding number of weekly claims, fell by 160K in the final week of August to 6.087 million and were 817K below their peak  of 6.904 million in the week of June 27th.  The size of this drop over the past three months is suspiciously large in light of the still-rapid pace of new layoff.  Jobless benefits are not an endless benefit, and the juxtaposed trends in new claims and the total of all claims supports the anecdotal evidence that a very large and expanding pool of long-term laid-off workers have given up the search for work and will need to manage affairs on a much tighter budget.  An upturn in employment still looks far away, and bear in mind that economic growth is possible only by increasing hours worked or production per man-hour.  Upwardly revised projections of growth in the second half of 2009 are being driven by the whipsaw of the inventory cycle, but the labor market situation suggests that this will not be the start of a sustained V-shaped recovery.  While I’ve used the U.S. circumstances to illustrate this point, it applies to Japan and Europe equally well.  In a fragile recovery it will be hard for all G-7 central bankers to unwind stimulus as vigorously as they might wish.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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