The merchandise trade deficit ballooned in May, rising from a revised gap of $43.6 billion in April (initially estimated at $43.7 billion) to a staggering total of $50.2 billion. Expectations had been that the trade gap would rise less dramatically, to $44.8 billion. By comparison, the deficits for the first four months of this year had been $47.9 billion in January, $46.0 billion in February, $46.8 billion in March, and the aforementioned $43.6 billion in April.
Contributing to the sizable pickup in the trade imbalance was a decline of $1.0 billion in exports and a sharp rise of $5.6 billion in imports. The nation's gross domestic product, which is composed of domestic economic activity plus exports minus imports, will be negatively affected by this expansion in the trade shortfall. In the first quarter, the nation's GDP had increased by a tepid 1.9%. Expectations, which had been over 3% for the recently ended quarter about a month or two ago, and which have come down to the 2.0%-2.5% range, now could well come in shy of the 2% mark, as it did in the opening period, if this trend in the trade balance is not reversed somewhat in June. Second-quarter GDP data will be issued late this month, and then revised in late August and late September.
Our sense is that with oil prices having come down rather sharply in June and thus far in July, with a barrel of crude falling from a 2011 high of about $115 to something south of $95, that the June trade deficit will narrow somewhat. However, the economic troubles in the euro zone could again hamper our export trade, thus capping any decline in the trade balance for June, which will be out in the middle of next month.
As for the May report, the Department of Commerce noted that exports eased in May by the aforementioned $1.0 billion to $174.9 billion, while imports rose to $225.1 billion. May imports were $5.6 billion more than April's import total of $219.4 billion. As for an average of the trade deficit, for the three months ended in May, the deficit was an average of $46.9 billion a month. For the three months ended in April, the average monthly shortfall was $45.5 billion. By way of further comparison, the trade gap in 2010 ranged from a low of $37.5 billion in January, to a high of $46.9 in June. In 2009, a weaker economy--the nation was just exiting the most severe recession in more than a generation at that time, the deficit ranged from a low of $25.5 billion in May to a high of $38.7 billion in December. Clearly, a cost of better economic growth is a widening in the merchandise trade deficit.
However, the latest totals are very sobering, as they come during a period of decelerating business growth, with the nation, unfortunately, not veering far from a path of stagflation, or stagnant economic growth and rising inflation. We are not yet on that unenviable road, which we were a regular traveler on during the 1970s, but we could be veering in that direction should the employment and housing markets not start to firm up soon and oil again reverse course and trend higher.
Looking ahead, to a hopefully narrower trade imbalance for June, we also see, albeit with not a whole lot of conviction, a somewhat better second half for the nation's economy, with estimated GDP growth of close to 3%.
At the time this article was writing, the author did not have positions in any of the companies mentioned.