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Economic Forecasts

Rising Trade Is Good News and Bad

Exports are headed up, but so are imports.

The improving appetite of both the U.S. and global economies is becoming evident. Trade statistics for February indicate increased demand for both U.S. imports and exports.

Recovering demand for motor fuel is driving up the price of imported crude oil. Rising imports of consumer goods suggest Americans are opening their wallets and purses wider. U.S. businesses are ramping up investment, drawing in foreign goods ranging from iron and steel products to finished computers. By the same token, foreign businesses are buying more U.S.-made capital goods, especially industrial engines and heavy machinery. And both imports and exports of autos and auto parts are on the rise, reflecting recovering intrafirm trade in the heavily integrated North American market.

With the U.S. recovery picking up speed, the demand for capital goods, oil, metals and other industrial inputs will increase in the coming months. We look for imports to climb 14% this year, after plunging 23% last year. At the same time, faster economic growth in Canada, Mexico and China will offset near-flat demand from the euro zone, Japan and the United Kingdom, pushing exports back into positive territory. Expect them to register a 14% increase in 2010, after falling by 15% in 2009. While exports and imports will grow at the same rate, the latter are growing from a much larger base. As a result, the net impact on U.S. economic growth will be a modest negative.

The trade deficit will expand for the first time since 2006, widening to more than $430 billion in 2010, the equivalent of 2.9% of gross domestic product. That follows its sharpest annual contraction in 18 years and its lowest level relative to the U.S. economy since 1998. Preliminary estimates put the U.S. trade deficit for 2009 at roughly $379 billion, or 2.7% of GDP.

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Gains in sales to emerging markets will exceed losses from developed markets, but just by a bit. While Canada and Japan will show steady growth, the U.K. and parts of the euro zone will be lucky if they avoid tipping back into recession. By contrast, the U.S.’ top emerging markets in Asia and in Latin America -- China, Brazil, India, Mexico and South Korea -- are all on track for strong recoveries.

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