Surprise jump in trade deficit worries economists
In a sign that Americans are persisting in the risky habit of buying more than they sell in the global economy, the U.S. trade deficit jumped unexpectedly in May to the highest level since November 2008.
That prompted some analysts to cut back their forecasts of how much the economy would grow in the second quarter and to warn that the underlying imbalance posed a threat to the nation’s long-term prosperity and economic strength.
“Definitely the weakness in trade through May suggests less momentum in the economy,” said Shawn DuBravac, chief economist for the Consumer Electronics Assn.
After Tuesday’s report, Macroeconomic Advisers, a major forecasting firm based in St. Louis, slashed its estimate of gross domestic product growth in the second quarter by 0.8 of a percentage point to a weak 2.4% annual rate. GDP, a measure of total economic output, grew by 2.7% in the first quarter.
Some economists were even more pessimistic.
“Now, a rising trade deficit and continued weakness among regional banks threaten to derail the recovery,” wrote Peter Morici, a University of Maryland professor and former chief economist at the U.S. International Trade Commission.
Longer term, analysts worry that the U.S. seems to be returning to a pattern of buying more than it can afford with financing from overseas while export-powered economies such as China continue to rack up surpluses. Many economists blamed at least part of the 2008-09 recession on such global economic imbalances.
The Commerce Department said Tuesday that the trade gap rose to $42.3 billion in May, up nearly 5% from April’s $40.3 billion. Economists had expected the May deficit to decline to about $39 billion because oil prices were lower and retail sales fell that month.
But American purchases of foreign-made computers, cars and consumer goods increased considerably in May. The deficit with China, which had eased during the recession and the early part of the recovery, is rising again and was a major factor in the higher trade gap in May.
For the first five months of the year, the trade deficit totaled $197.8 billion — a 38% increase from the January-to-May period of 2009. In manufactured goods, China accounted for more than 70% of the shortfall.
U.S. manufacturers have long complained that China deliberately undervalues its currency, the yuan, giving its exporters a low-cost advantage over foreign competitors. Beijing said last month it would allow a more flexible exchange rate. But the yuan has yet to strengthen significantly.
“The best answer is for China to move faster on its currency [appreciation] and … make their market easier for the U.S. to sell into,” said Frank Vargo, vice president for international economic affairs at the National Assn. of Manufacturers.
Analysts were surprised at the strength of imports in May, given that U.S. consumers remain skittish about spending and that many manufacturers have largely finished rebuilding their inventory of goods after slashing them during the recession.
Diane Swonk, chief economist at Mesirow Financial in Chicago, said she thought some of the import growth resulted from stockpiling — that is, retailers and producers buying more foreign goods than they need now out of concern about a potential trade war with China. Some U.S. lawmakers have long threatened to take tougher action against China to curb the large trade deficit with the Asian nation.
Other industry and trade-group analysts said they had not heard of any such major hedging activity on the part of businesses. “The one area where I see there might be some stockpiling is in toys, because toys are bought months in advance — and there is some concern,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm in New York.
Some economists viewed the rise in U.S. imports as a positive sign, mostly of strengthening domestic demand. And some of the gains in such imported goods as computers are likely to reflect increased investment by U.S. businesses as well as robust consumer demand for products like the Apple iPad, which is made in China.
Even so, most of the economic indicators of late, including jobs, housing and retail sales, suggest that U.S. economic growth is losing some momentum. And although greater imports can lead to some job creation, particularly in areas such as transportation and distribution, a rising trade deficit subtracts from overall economic and job growth.
As part of an effort to rebuild the U.S. economy on more solid footing, President Obama has set a goal of doubling exports in five years. And for the first five months of this year, American exports were up 17.7% from the same period of 2009, helping fuel a rebound in the manufacturing sector.
At that rate, Obama would have no trouble meeting his goal. But given the weak economies in Europe and Japan and the U.S. market share in Asia slipping in recent years, analysts say it will be hard to maintain that vigorous pace in export growth.
What’s more, it won’t be easy to change the pattern in which U.S. imports are expanding at an even faster pace than exports. Through May of this year, U.S. imports were up 21.4% from a year earlier, to $937.4 billion, far in excess of $739.5 billion in exports.