In nominal terms, the U.S. April trade deficit narrowed significantly to $58.5
billion from March's downwardly revised gap of $62.4 billion. In price-adjusted
terms, the trade deficit in goods also narrowed sharply in April to $54.9 billion
from March's $59.6 billion. So, this more-than-expected narrowing in the trade
deficit ought to cause forecasters to bump up their secondquarter GDP forecasts,
right? Wrong. Most of the narrowing in the deficit was the result of weaker
imports, not stronger exports. In price adjusted terms, imports of goods fell
3.6% month-to- month, while exports fell 0.4%. If imports fell, then that means
that some line-item of domestic demand was negatively affected because imports
are part of consumer/business final spending or business inventories. Price-adjusted
imports of consumer goods, including autos, fell 4.1% in April; price-adjusted
imports of capital goods fell 1.2%. Yesterday, the Census Bureau reported that
wholesale inventories of motor vehicles and parts declined 3.6% in April. This
probably is related to the 4.6% decline in price-adjusted imports of motor
vehicles and parts in April. In sum, rather than revising up one's GDP forecast
on the basis of the narrower-than-expected April trade deficit, one might consider
marking it down some of the components of domestic demand a couple of ticks.
As mentioned, price-adjusted U.S. exports of goods fell 0.4% in April. I keep
hearing how strength in foreign economies are somehow rescue a U.S. economy
that is experiencing a recession in housing, a sharp slowdown in the growth
of consumer spending and corporations that are more interested in buying back
their own shares than a few extra drill presses. Then I read my Reuters headlines
this morning: "German industry output sees biggest fall in 7 years," "Japan
machinery orders rise less than expected," "Canada adds fewer jobs than expected
in May" and "Italy GDP growth slows as inventories contract." Central banks
have been and will continue in the near term to raise their policy interest
rates. With a lag, these interest rate increases will start to retard domestic
demand abroad. And the slowdown in U.S. imports from the rest of the world
will have a negative effect on foreign economies' export sectors. Look at the
curve in the road ahead, not the straight-away you see in your rearview mirror!