Shrinking Trade Gap Shows Economy's Underlying Strength

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Trade Gap
Lynne Sladky/AP
By Lucia Mutikani

WASHINGTON -- The U.S. trade deficit fell in July to its lowest level in five months as exports rose broadly, signaling underlying strength in the economy amid concerns about a global growth slowdown.

While other data Thursday showed an increase in the number of Americans filing new applications for unemployment benefits, the trend in jobless claims remained consistent with a strengthening labor market. Activity in the vast services sector also hovered at a 10-year high in August.

%VIRTUAL-pullquote-There is little evidence that the abrupt deterioration in financial market conditions and the heightened concerns about the global economy have begun to affect the U.S. economy.%"There is little evidence that the abrupt deterioration in financial market conditions and the heightened concerns about the global economy have begun to affect the U.S. economy," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

The Commerce Department said the trade gap narrowed 7.4 percent to $41.9 billion, the smallest since February. When adjusted for inflation, the deficit fell to $56.2 billion from $59 billion in the prior month.

The smaller deficit implied a modest contribution to gross domestic product from trade early in the third quarter. Trade added 0.3 percentage point to the economy's 3.7 percent annualized growth rate in the second quarter.

Data ranging from consumer spending to employment and housing have suggested the economy retained much of its momentum from the second quarter and was on solid footing when global financial markets were rocked by turbulence triggered by worries over China's economy.

Stocks on Wall Street were trading higher after the data. Investor sentiment also was boosted after the European Central Bank indicated it could prolong its monetary stimulus program.

The dollar rose against a basket of currencies, while prices for longer-dated U.S. Treasuries fell.

In a separate report, the Labor Department said initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 282,000 for the week ended Aug. 29.

The claims data has no bearing on Friday's closely watched employment report for August as it fell outside the survey period. According to a Reuters survey of economists, nonfarm payrolls likely increased by 220,000 last month after rising 215,000 in July.

But job gains could come in below expectations as the first reading of August payrolls has tended to be weaker in the last several years before being revised higher.

Eyes on Fed

The August employment report will be released less than two weeks before the Federal Reserve's Sept. 16-17 policy-setting meeting. There is speculation the U.S. central bank could raise interest rates at that meeting.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 3,250 to 275,500 last week.

It was the 23rd straight week that the four-week average remained below the 300,000 threshold, which is usually associated with a strengthening labor market.

A third report from the Institute for Supply Management showed its services industry index slipped to 59 last month from a reading of 60.3 in July, which was the highest since August 2005. A reading above 50 indicates expansion in the sector.

Fifteen out of 18 service industries, including real estate, construction and retail trade, reported an expansion in activity -- the most since October. Only mining reported a contraction.

"The domestic economy is holding strong. The Fed must weigh this against the prospects of a weakening global economy as they decide whether to raise interest rates in two weeks," said Jay Morelock, an economist at FTN Financial in New York.

The strong services sector should help offset the drag on the economy from manufacturing, which has been hit by a strong dollar and spending cuts by energy companies.

But the buoyant dollar's negative impact on the economy is starting to ease. Exports increased 0.4 percent to $188.5 billion in July, the first rise since April. There were increases in exports of food, industrial supplies and materials, and capital goods in July. Automobile exports also rose.

Imports fell 1.1 percent to $230.4 billion, led by consumer goods such as pharmaceuticals and cell phones. However, automobile imports were the highest on record and the value of crude oil imports was the highest since January.

Soft import growth is usually associated with sluggish domestic demand. The weakness, however, is probably related to a slowdown in inventory accumulation as businesses try to whittle down a huge stockpile of merchandise accumulated in the first half of 2015.

The politically sensitive U.S.-China trade deficit was $31.6 billion in July, up 0.4 percent from June. That trade gap will be closely watched in the coming months in the wake of China's recent devaluation of its currency.

Exports to Canada fell 8.3 percent in July and could come under more pressure after the Canadian economy slipped into recession in the second quarter.

9 Numbers That'll Tell You How the Economy's Really Doing
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Shrinking Trade Gap Shows Economy's Underlying Strength
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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