U.S. trade deficit jumps as imports soar

The nation's trade deficit soared to $32.0 billion in July, the U.S. Commerce Department announced Thursday, but the rise was propelled by a sharp increase in imports, which suggests domestic demand -- tepid for so long during the recession -- is starting to recover, a good sign for the U.S. economy.

Further, it was the highest deficit since January and the largest one-month increase since February 1999. Economists surveyed by Bloomberg News had expected the trade deficit to total $26.0 billion in July. The trade deficit totaled a revised $27.5 billion in June.

Also, the trade deficit with China totaled $20.42 billion in July, a whopping 18 percent drop from the $25.01 billion recorded in July 2008 -- a statistic that shows just how much American consumers have pared their budgets to eliminate optional purchases amid the recession. The trade deficit with the European Union surged to $8 billion from $4.5 billion in June.

Imports jump

In July, imports soared 4.7 percent to $159.6 billion, driven higher by an increase in the price of imported oil, as well as by demand for cars, automotive parts, computers, televisions, and industrial supplies. The increase in auto purchases undoubtedly was aided by the federal government's "cash-for-clunkers" program, but Commerce Department officials caution that it will be several months before precise data on the impact of the clunkers program will be available.

Also, exports rose 2.1 percent to $127.6 billion, propelled by increased sales of of capital goods, civilian aircraft, computers, industrial supplies, and consumer goods.

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: An unusually large increase in imports pushed the July deficit higher, but investors should not be alarmed. In fact, U.S. stock markets will likely interpret the July trade data bullishly. The reason? First, high oil prices skewed the July data upward. Second, if exports increase, as expected, in the months ahead, the July data's import jump indicates increasing demand in the U.S. -- something the nation hasn't seen since the recession started in December 2007.

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, as it would keep more dollars at home, re-circulating in the American economy, aiding investment and helping to create domestic jobs. Of course, any comprehensive energy policy that continues to lower the nation's imported oil bill would further improve the nation's trade picture.

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