U.S. trade deficit increases slightly to $27 billion

Today's report from the U.S. Commerce Department was mildly encouraging: The trade deficit rose slightly to $27 billion in June, though most of the increase was caused by higher prices, not volume. After eliminating the impact of inflation, the trade deficit actually fell to its lowest level since 1999.

Economists surveyed by Bloomberg News had expected the trade deficit to total $28.5 billion in June. In more good news, the trade deficit totaled a revised $26 billion in May, down from the $28.8 billion earlier estimate. The trade deficit totaled $29.2 billion in April and $28.5 billion in March.

Exports unexpectedly increase

Further, exports unexpectedly rose two percent to $125.8 billion in June from $123.4 billion in May -- something few economists had forecast, given continued weak demand conditions internationally. Sales of industrial materials, capital goods, foods, feeds, beverages, automotive parts and engines led the way. Exports of consumer goods were virtually unchanged. Also, in the past year real exports have declined 21 percent.

Meanwhile, imports rose 2.3 percent to $152.8 billion in June from $149.3 billion in May, with much of that increase coming from higher oil prices: oil imports surged 24 percent to $17.2 billion. The price of a barrel of imported oil rose to $59.17 from $51.21 -- its highest level since November 2008. Sales of automotive vehicles, industrial supplies and materials also led the import total. Still, take away inflation and imports barely rose in June; one example: real imports of goods, which increased just 0.1 percent. Imports of consumer goods declined, as U.S. consumers continued to limit their discretionary purchases. In the past year, real imports have declined 21 percent.

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.

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. The significance for investors? The improving (decreasing) trade deficit was a major contributor to U.S. GDP growth in the second quarter, which limited the depth of the U.S. recession. Americans continue to cut back their consumer goods purchases, which is why real imports were basically flat in June and have fallen in the past year. The hyper-consumption that characterized the leveraging boom era was unsustainable and has ended, and the era of the "frugal consumer" is well underway.

Further, if the dollar does not appreciate substantially (not likely in the quarters ahead), 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. That would be a major plus for the U.S. economy.

What would really help cut the trade deficit and boost the U.S. economy? Pass a comprehensive energy policy to reduce its dependence first on imported oil, and then on oil, in general. That will keep more energy dollars at home, re-circulating in the American economy, aiding investment and helping to create domestic jobs.

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