U.S. Trade Gap Widens in April, Wholesale Prices Fall in May

After narrowing in March on the weak U.S. dollar, the United States trade deficit opened back up in April, the Commerce Deparment reported on Friday. U.S. exports rose to better than $106 billion, but a surge in foreign imports outpaced the money American manufacturers earned overseas. The overall trade deficit expanded to $57 billion, not quite as high as the $58 billion analysts had predicted, but still worrisome because it reverses a narrowing of the trade deficit in March, when the imbalance came in at a revised $55 billion in red ink. The trade deficit with China, which many economists hope will start to close, instead expanded from $10 billion in March to $12 billion in April.

Overall, trade with Asia showed some signs of becoming more balanced, but this was offset not just by China, but also by a widening gap with the United States's trading partner to the north, Canada, which is increasingly becoming a significant exporter to the States of American-label cars as the big three automakers move more and more production to the Canadian side of the border.

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Although U.S. aircraft are popular with overseas purchasers, sales can vary widely from month to month and therefore cause considerable volatility in the overall trade deficit.

  Acting as a counterbalance to the flow of big-ticket items into the U.S., aircraft manufacturers had a good month for overseas sales, which contributed strongly to the rise in exports. In the other direction, even though oil prices slipped downward in April, the total value of oil shipped into the country rose by $600 million as energy usage pushed upward, to some extent in reaction to the lower cost of gasoline at the pump during part of the month. Analysts anticipate that, with oil prices easing in May, the next trade deficit figures might be better, but other factors could smother cheaper May oil, especially if rising demand outstrips the falling prices.

However, even with signs pointing to particular sectors possibly having a good showing in May, the overall outlook for the U.S. trade deficit is not so favorable from the perspective of basic macroeconomic analysis.

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Underlying the central bank's successive upward pushes on short-term interest rates is the fundamental demand for lendable funds, which remains strong enough to hold interest rates high because of massive borrowing by the United States government to fund the record federal budget deficits.

  With interest rates in the U.S. on the rise because of tightening monetary policy by the Federal Reserve, American dollars are going to become more attractive to foreigners, strengthening the U.S. dollar and thereby making U.S. exports progressively more expensive overseas while making foreign imports to the U.S. cheaper. Without a long-term, structural solution to the higher interest rate environment in the U.S., the trade deficit cannot materially narrow, although some success in that realm could be achieved were the Chinese central bank to fulfill rumors that it is considering revaluing its currency, the yuan, against the dollar.

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To allow a currency to "float" means that a country lets the global currency markets set the price according to more or less pure supply and demand conditions.

  Although it is unlikely that the Chinese would allow the yuan to float against the greenback, any revaluation that would bring the exchange rate closer to a market rate would benefit U.S. exporters by making their goods cheaper in China at the same time it would make Chinese goods more expensive in America. The downside of this is that U.S. consumers would end up paying more for American-made goods as well as for imports, since the products made in the U.S. would tend to reflect prevailing prices of the competing, substitute Chinese goods.

In other news, the Labor Department on Tuesday released the preliminary figures for the producer price index showing that inflation at the wholesale level dropped by a nearly stunning six-tenths of a percent in May. Excluding the volatile food and energy sectors, the producer price index rose by a modest tenth of a percent. The difference was primarily attributable to the May slide in energy prices due to the fall in the price of crude oil during the month. That downward trend has since turned around, with oil closing Monday above $55 per barrel and remaining above that mark at the closing bell Tuesday, as well.

The evidence of less inflationary pressure could give the Federal Reserve some room to give the economy a breather from the record string of short-term rate increases it has instituted over the past year.

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Stock prices are based upon investors' expectations about the future. If those expectations change because of new information, then stock prices will adjust to reflect investors' reconsiderations about the future.

  Such a respite should be welcome news to the stock markets, since it would mean not only that economic growth would not be as hampered by higher interest rates, but also that previous assessments of the long-term outlook for growth could be revised, allowing stocks to rise to reflect new, more optimistic assessments. Curiously, and contrary to this scenario, stocks simply drifted today, rising in the morning, but pulling back in the afternoon to close with only minimal gains for the major indices. Although there are a number of possible reasons the markets didn't react with strong favor to the hopes of a less aggressively contractionary monetary policy on the part of the Fed, some economists suspect that investors are awaiting more economic figures, including the consumer price index and the level of business inventories in May, both of which will be released Wednesday.