It looks as though June's stronger dollar played a short-term role in international trade. The latest trade report showed an expanded deficit, mostly due to the trade of non-petroleum goods and an expanded trade deficit with China, the EU and OPEC nations. We found it troubling to see exports fell in June, while imports grew. The best case realistic scenario is one where both imports and exports are growing.
Markos N. Kaminis earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, for Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV & radio. While writing for Wall Street Greek, he presciently predicted the financial crisis in detail.
The headline report today came in the form of the International Trade data for the month of June. The report was released in the pre-market, and offered an exaggeration of expectations. Economists expected the deficit to show modest expansion in June, to $42.35 billion. Rather, the deficit widened broadly to -$49.9 billion, the widest mark since October 2008. While a return to the economic activity of years past should translate into higher trade deficit, the drivers this month were not entirely positive in nature. The trade deficit for June will also play a negative factor in Q2 GDP revision.
The deficit expanded, not due to faster growth in imports than exports, which would be healthy and normal historically speaking, but due to polar divergence between imports and exports. While imports increased by $5.9 billion, exports dropped $2.0 billion against May levels. All the action was centered around the trade of goods versus services, and goods carry 3.4 times the importance of services in trade, based on June's data.
You might have expected the deficit to be greatly impacted by reduced European demand for US exports given EU issues, and the deficit between the EU and US did expand to $7.8 billion, from $6.2 billion. However, it was an expansion of the trade deficit with China that did most of the driving in June, with deficit expansion to $26.2 billion, from $22.3 billion.
The deficit also expanded between OPEC nations and the US, to $8.9 billion from $7.8 billion. We would expect this to be the result of change in the price of energy and petroleum based goods in June. However, oil prices came down sharply from May, and the average price of oil in June was lower as a result of little change through the month. Indeed, the non-seasonally adjusted petroleum deficit stood at $21.2 billion, while the non-petroleum unadjusted deficit was $40 billion. The government notes the numbers do not add up due to seasonal adjustment and rounding. Petroleum imports greatly outweigh exports, and so the petroleum trade deficit actually narrowed slightly in June. It seems something else is driving the general trade deficit expansion between the US and OPEC nations. After inspection, it was the seasonal adjustment to petroleum trade that led to the expansion, and volumes demanded increased by 32 million barrels. Perhaps Gulf moratorium and related issues played a role.
The details of the report show that the deficit was mostly driven by decreases in the export of capital goods ($1.4 billion), industrial supplies and materials ($1.0 billion) and increases in the import of consumer goods ($3.1 billion), automotive vehicles and parts ($1.3 billion), other goods ($0.6 billion) and capital goods ($0.5 billion). The decrease in exports is troubling in this context against a sharp increase in imports, and it may be due to the stronger dollar that existed in June.
The euro and British pound have gained ground against the dollar over the past month though, thanks to EU stress tests, and the yuan is doing the same on China's economic reins. However, in light of the latest Fed informal forecast published within its monetary policy statement, risky assets are selling off and the dollar is strengthening again.
Buyers of commodities are global shoppers, and will take from cheapest source; it seems where options exist and where differentiation is minimal, the US can't compensate its exporting activity for dollar strength. The good news is that we're a finished goods producer, wherever we still produce goods. However, with the rapid development of the emerging world, perhaps the American differentiation advantage dissipates. Perhaps then trade is even more sensitive to currency fluctuation, in the world's favor versus the US. This brings currency policy with unfair players like China into focus, and so expect to see a rising argument in the American political spectrum.
The gain in imports may also have been affected (like exports) by relative dollar strength in June, versus the organic demand for goods we would hope for in economic recovery. Are American products losing their luster overseas and at home, as we demand more payment in foreign currency and find cheaper foreign goods more appealing? I would not lose too much sleep over this, as I think it's clear this is only a temporary effect, as the dollar should lose value over time (and has since June), in my long-term view. Also, transportation costs look to rise as global growth resumes and pressures fuel prices again, putting pressure on foreign producers selling into the states.
I also look for (hope for) an American manufacturing revival in the alternative energy technology space, which could boost demand for American differentiated goods again overseas. I'm not just speaking to solar panels, but to the autos and other goods that will include new and hopefully well protected technology. This is something any American president should be seeking, as the nation has its working class majority to provide for, as well as the sophisticates we all seem to think we are.
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