Trade Gap No Worry for Economic Growth

A narrowing of the U.S. trade gap in July should help dispel concerns about economic growth petering out. A curiously huge $49.8-billion deficit in June -- the widest in almost two years -- prompted many analysts to trim growth forecasts on the basis of weaker foreign trade performance. But as we anticipated, July brought a reversal, with the trade deficit narrowing to $42.8 billion, confirming our view that the June spurt was a fluke, due to a combination of special factors.

In particular, the steep widening in the June trade deficit was accompanied by especially strong imports of consumer goods and a deteriorating bilateral trade balance with China. While the U.S.-China trade deficit is destined to widen this year, the exaggerated spread that month was almost certainly due to a July 15 tax increase on Chinese exports. To beat the tax, exporters hastened to get merchandise out the door ahead of time. The thesis seems to have been borne out in July, as the trade deficit vis-à-vis China narrowed and U.S. imports of consumer goods fell.

Another June peculiarity was a yawning trade gap for petroleum products. At first glance this seemed strange because domestic oil stockpiles were already far above normal levels, and rising import levels only drove those inventories higher. But it increasingly appears that refiners were hedging the uncertainties surrounding the BP oil leak and building inventories as a precaution. During July, as the situation in the Gulf settled down and the leak was eventually capped, holding large precautionary supplies seemed less important, and the petroleum trade balance narrowed.

From just $107.88 $24.99 for Kiplinger Personal Finance

Be a smarter, better informed investor.

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Both of these reversals -- the narrowing trade gap with China and on petroleum balances -- probably persisted through August, though it will be another month before we can confirm those suspicions.

The fact is that foreign trade should be mostly neutral in its overall impact on economic activity over the next year. Strong gains in exports will be matched by slightly stronger gains in imports, resulting in a slightly wider trade deficit this year and next. Compared with a deficit of $375 billion last year (in constant 2005 dollars), this year’s trade gap will come in around $413 billion, then grow to about $450 billion in 2011. Given that our economy continues to expand, however, the figures translate into a roughly constant share of output of about 2.8%. Stated differently, foreign trade is going like gangbusters, far outstripping domestic economic performance. But with imports and exports largely offsetting, their combined effect on growth should be negligible over the year ahead.