U.S. Trade Deficit Remains NearThe Narrowest Since 2001

As the U.S. recession continued, the foreign trade deficit remained near its narrowest level 2001. The deficit of $27.0B was just slightly deeper than the unrevised May level of $26.0B. Consensus expectations had been for a deficit of $28.5B. Higher petroleum imports have been the main source of upward pressure on the trade deficit recently. Higher crude oil prices raised them by more than one-quarter during June and by 12.2% so far this year. Offsetting that increase was the U.S. recession which caused June nonpetroleum imports to fall by 1.0%. That pulled their decline so far this year to 15.7%. Higher exports were the second factor which limited trade deficit deterioration during June. The competitive foreign exchange value of the dollar helped exports to rise by 2.0% after a firm 1.6% gain during May. Nevertheless, recessions abroad have lowered exports by 5.4% since December.

The rise in petroleum imports was driven by higher crude oil prices. They rose to a June average of $59.17 per barrel versus the February low of $39.22. The recession and the rise in prices prompted, however, a decline in the volume of petroleum imports. Despite a June gain they have fallen roughly ten-percent since December. The recession has had the additional effect on limiting the size of the trade deficit by dropping nonoil goods imports. They fell a hefty 1.0% during June for the ninth sharp monthly decline in a year.

Adjusted for price inflation overall and for higher oil prices specifically, the trade deficit in goods actually narrowed slightly during June to $35.9B, the lowest since 1999. It was down from $45.3B last June. Real non-auto consumer goods imports fell a hard 4.8% m/m and are down 17.8% y/y, near their lowest level since 2005. Automotive vehicles & parts imports were down by exactly one-half versus last year. Non-auto capital goods imports continued to reflect the weakness in investment and fell 24.4% y/y near their lowest level since 2004.

Though services imports rose 2.3% during June that followed ten months of decline and they were off by nearly one-third y/y. Travel imports were down 12.8% y/y as passenger fares dropped by 9.0%.

Real exports added 0.6% to their 1.9% gain during May. Nevertheless, recessions abroad caused them to fall by 21.4% year-to-year to near the lowest level since late-2005. The chained dollar value of non-auto consumer goods exports slipped m/m and were down 13.8% y/y. Real capital goods exports jumped 1.5% but were off 20.6% y/y while exports of automobiles & parts were off by roughly one-half from last year.

Nominal exports of services rose 1.3% (-11.5% y/y) for the first material increase since last fall. Travel exports fell 18.8% y/y as fewer foreign citizens came to the U.S. even as passenger fares fell 22.5%.

The U.S. trade deficit in goods with China deepened again, during June to $18.4B. Imports from China fell 14.1% y/y while U.S. exports fell a lesser 10.3%. The trade deficit with Japan deepened sharply to $3.7B but it remained near its shallowest since 1990. The U.S. recession drove imports from Japan down by 36.5% year-to-year while U.S. exports to the country fell by 30.4%.

Euro Area industrial output rose in May but is back to its declining ways in June. The negative rates of growth are still diminishing to a decline of 4.8% over three months from -15.1% over six months and from -18% over twelve months. Trend progress continues despite the months set-back. And, with this monthly drop, the region steps back behind the line that says it has turned the corner to growth. It has not.

Nondurable output is actually increasing taking some of the downward pressure of consumer goods output where durable goods trends are still horrifically negative.

Country level trends have flattened out or show progress to positive output In Germany, France, Spain and in the UK. Germany, France and Spain show positive three-month output growth rates for MFG. But over six- and twelve-months all the large countries are still showing output declines.

Underling the erratic and slow nature of progress in EMU, Germany’s July IFO report show some progress is still being made, but at a snail’s pace. The IFO’s current conditions and expectations readings edged higher, boosting the German index for business climate in July. But the IFO’s overall and sector readings on diffusion tell us that this progress while small is still not very widespread as diffusion indices remain negative and made their own small progress in the month. The biggest sector improvement in the current diffusion index presentation was in retailing. Manufacturing made the biggest improvement in the expectations section. But services made the turn from a negative reading to a positive one in the expectations survey- a significant development even if on a small two-point move.

Some of the luster from retailing’s gain in the current sector survey is lost as the expectations for retailing made a similar but opposite large move losing ground and blunting the current message of improvement in the sector. .

Conditions in Germany and in EMU remain in flux. Trends are in the right direction but some are still slow-moving. We still see episodic signs of backtracking. It’s too soon to say it is recovery or to be sure that we are going there, despite the strong readings from the OECD leading indicators. Questions remain.

In an anticipated and unanimous vote, the Federal Open Market Committee today left the Federal funds rate in a "range from 0 to 1/4 percent." The discount rate also was left unchanged at 0.5%. The Fed funds rate remained the lowest ever.

The Fed indicated that "Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Again, much of the commentary on the economy was similar to the last two meetings and concluded that "Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability."

Regarding inflation the FOMC statement acknowledged the rise in energy & other commodity prices, but concluded that substantial economic slack will leave inflation "subdued for some time."

In its effort to promote economic liquidity, the Fed used similar language as in June, "... to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities."

New was the indication that "the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October."

For the complete text of the Fed's latest press release please follow this link.

The Haver databases USECON, WEEKLY and DAILY contain the figures from the Federal Reserve Board.

The Shadow Banking System: Implications for Financial Regulation from the Federal Reserve Bank of New York can be found here.

What Do We Know (And Not Know) About Potential Output? from the Federal Reserve Bank of St. Louis is available here.