Summer light: US trade deficit falls to lowest level since 1999

There weren't many bright data points for investors this week, but the U.S. trade front offered one: the nation's trade deficit fell nine percent to $25.96 billion in May -- its lowest level since 1999, the U.S. Commerce Department announced Friday.

Economists surveyed by Bloomberg News had expected the trade deficit to total $28.8 billion in May. More good news: the April trade deficit was revised to a slightly lower level, to $28.8 billion from $29.2 billion. The trade deficit totaled $28.5 billion in March and $26.0 billion in February.

Exports unexpectedly increase

Further, exports unexpectedly rose 1.3 percent to $123.3 billion -- something few economists forecast, given weak demand conditions internationally. Sales of industrial machinery, capital goods, chemicals, consumer goods, and petroleum products led the way.

Meanwhile, imports continued their downward arc, pushed lower by belt-tightening U.S. consumers. Imports fell 0.6 percent to $149.3 billion. Imports declined in industrial materials, consumer goods, autos, and auto parts. The U.S. also imported less oil in May -- an average of 8.4 million barrels per day (bpd) -- that item's lowest average level since September 2008.

The nation's trade deficit has declined for about one year. The pronounced recession that has created hardship and havoc in every quartile of U.S. society has led to one long-term benefit for the U.S. economy: a decreasing trade deficit, which results in less loss of U.S. wealth to foreign sources.

Zach Pandl, an economist with Nomura International Securities in New York, likes the export tone of the May report.

"Orders for durables in the past few months have picked up and some of that demand is coming from overseas," Pandl told Bloomberg News Friday.

Also in May, the U.S.'s trade deficit with the European Union plunged 48 percent to $2.8 billion; however, the deficit rose slightly with China, to $17.5 billion from $16.8 billion in April.

Economists prefer that a nation run a trade surplus as opposed to a trade deficit, as it usually implies that a nation's goods are competitive on the world stage, its citizens are not consuming too much, and that it's amassing capital for future investment and economic goals.

Economic Analysis: The nation's trade deficit picture continues to improve. Clearly, Americans are cutting back their consumer goods purchases, and it's reflected in the steadily declining import total. The hyper-consumption that characterized the leveraging bubble era was unsustainable and has ended, and the era of the "frugal consumer" is well underway.

Further, a likely, lower average price for imported oil in the months ahead will further lower the deficit. Moreover, if the dollar does not appreciate substantially (not likely), sales of U.S. goods to foreign buyers should get a modest tailwind as the global recovery starts, and there is a decent chance the U.S. could start running a monthly trade surplus in late 2010. Significance? That will keep more dollars at home, re-circulating in the American economy, aiding investment and helping to create domestic jobs.

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