Is the U.S Finally Beginning to Sort Out Its Trade Issues?

Money

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Claims of economic recovery in the second quarter continue to find evidence in hard data. The gap between U.S imports and exports of goods and services narrowed 5.5 percent to $44.4 billion in May from $47 billion in April, according to data published by U.S Bureau of Economic Analysis on Thursday. Particularly encouraging is that the gap shrunk more due to increase in an increase in exports rather than a reduction in imports, after exports touched a record high in May. This indicates that demand both domestically and internationally is strong.

Exports of goods and services rose $2 billion to an all-time high of $195.5 billion in May. The rise was driven by a robust increase in exports of petroleum and related products, which rose to $5.5 billion in May from $4.6 billion in April, a 20 percent increase on a month-to-month basis. Crisis in Iraq is pushing countries to look for alternate sources of oil and the U.S. may stand to gain from such demand. Overall exports of industrial supplies and materials were up to $42.1 billion in April from $41.9 billion in April, while imports narrowed to $55.9 billion in May from $57.6 billion in April.

The merits of reducing imports to strengthen the economy have been debated by economists, but generally such a reduction could mean two things: either demand for foreign-made goods has declined, or the U.S. has started to meet demand for those goods domestically through the implementation of cost-reducing technology and more cost-efficient methods of production.

Imports of goods and services narrowed only about $0.7 billion to $239.8 billion in May, showing a steady demand for foreign made goods and services. The April to May contraction in imports of goods reflected decreases in imports of industrial supplies and materials ($1.7 billion), consumer goods ($0.5 billion), and foods, feeds, and beverages ($0.2 billion), according to BEA data. Imports of cars and automotive vehicles and engines were up $1.3 billion along with imports of capital goods, which rose about $1 billion between April and May.

Services exports were up $0.3 billion from April to May, mostly led by increase in travel, including education ($0.2 billion) and in transport ($0.1 billion), which includes freight and port services and passenger fares.

These numbers are a marked improvement over the trade numbers in the first quarter when the deficit touched an 18-month high. But demand for U.S manufactured goods still remains wobbly. The new export orders component of the Markit PMI survey was down to 50.6 in June from 52.2 in May this year. This could be due to cost inefficiencies and low price competition from the emerging markets that have flooded the global market place with cheaper substitutes.

U.S merchandise trade contributes about 24 percent to the country’s gross domestic product, data from WorldBank shows. This is why it is a closely tracked indicator of the aggregate demand in the economy. A very adverse trade imbalance position has the potential to affect the relative value of a currency in the foreign exchange market. A weak currency could make imports more expensive and exports uncompetitive.

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