As U.S. Exports Fall, Is the Recovery in Jeopardy?

trade containers shipping
trade containers shipping

The U.S. trade deficit rose to $40.3 billion in April from a revised $40.0 billion in March. The move will likely intensify the debate on the U.S. recovery's durability.

The reason? Imports dipped 0.4% to $189.1 billion -- not a surprising statistic, given pinched U.S. household budgets -- but exports fell more, 0.7% to $148.8 billion.

The fall in exports -- the first substantial, monthly export decline in about a year, if one discounts a slight dip in February -- will likely provide fodder for the economy bears, who argue that international demand is not doing its part to help the U.S. recovery advance to self-sustaining expansion status. The bears will also likely point to the real (inflation-adjusted) export total for goods: it plunged 2.5% in April; meanwhile, real imports of goods declined 1.5%.

Conversely, the economy bulls will argue that although April's export decline was not insignificant, one month's data is not nearly enough to conclude that a trend reversal has occurred. Further, the long-term export performance is impressive, even though it started from a low, recession-depleted base: exports are up 18.5% since January 2009, when exports totaled $125.5 billion. During the same period, imports are up 17.0%

The Dollar May Be Decisive

Economists surveyed by Bloomberg had expected the trade deficit to total $41.0 billion in April. The trade deficit was $40.1 billion in February and $35.1 billion in January.

Although the trade deficit is higher than a year ago, when it totaled $28.5 billion in April 2009, it's still well below levels hit during the previous economic expansion. The trade deficit ballooned to levels above $60 billion in the spring/summer 2008 -- a period many economists now conclude was characterized by unsustainable, over-consumption by U.S. households.

One dimension that both the bears and bulls agree on is that if the trade deficit continues to fall, it will likely lead to an upward revision in first quarter U.S. GDP growth from the most recent estimate of 3.0%. Simultaneously, economists will likely increase their second quarter GDP growth estimates, which are generally in the 3.1% to 3.5% range.

A declining trade deficit would boost U.S. GDP because deficits transfer income and wealth out of a country. 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.

Outside of more cautious U.S. consumers, one factor that's helped lower the trade deficit has been the dollar, which was weak compared to the world's other major currencies for much of the recession. A weak dollar boosts exports by making U.S. goods/services less expensive for international customers. However, the dollar has strengthened in 2010, particularly against the euro -- and that may limit export gains in the coming months, if the dollar's recent rise endures.