U.S. Trade Deficit Unexpectedly Rises in May, but Oil Imports Drop

The unexpected rise of the U.S. trade deficit in May to $42.3 billion will provide a small amount of ammunition for both sides in the ongoing war between the economic bulls and bears.

The bulls will argue the rise, which contained a 2.4% increase in exports to $152.3 billion, is evidence of continued international demand for U.S. goods -- something that will boost the nation's GDP growth.

Conversely, the bulls will argue that the faster 2.9% rise in imports to $194.5 billion shows a U.S. economy that may be returning to a familiar, but unsustainable, pattern -- consuming more foreign goods than it can afford.

The consensus of economists surveyed by Bloomberg had been that the trade deficit would fall to $39 billion in May from its $40.3 billion level in April. The trade deficit totaled $40 billion in March and $40.2 billion in February. The trade deficit's 3-month moving average now totals $40.9 billion. Also, May's total brought the 2010 trade deficit to $197.8 billion, up 37.7% from $143.8 billion for the same period a year ago.

Export Recovery Continues

However, one long-term trend that will continue to benefit the U.S. economy is the impressive rise in exports, which are up 21.4% since bottoming out in January 2009.

It's also worth noting that May's higher trade deficit stemmed largely from increased imports in the non-petroleum segment, whose deficit increased to $32.3 billion in May from $27.8 billion in April. By contrast, the petroleum goods deficit decreased to $21.5 billion from $24.1 billion.

The U.S. trade deficit in May with key nations was as follows: China, $22.3 billion, up from $19.3 billion in April; OPEC, $7.8 billion, down from $9.3 billion; European Union, $6.2 billion, up from $5.7 billion; Mexico, $6.2 billion, up from $5.3 billion; Japan, $3.6 billion, down from $4.8 billion; Germany, $2.9 billion, down from $3.0 billion; Canada, $2.3 billion, down from $2.8 billion; Nigeria, $2.2 billion, down from $2.3 billion; Venezuela, $2.1 billion, up from $1.8 billion; and Ireland, $2.2 billion, up from $1.4 billion.

Meanwhile, the U.S. recorded some trade surpluses in May: $1.6 billion with Hong Kong, down from $1.7 billion in April; Australia, $1.1 billion, down from $1.2 billion; and Egypt, $300 million, unchanged from April.

Economists generally 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 overconsuming, and that it is amassing capital for future investment and economic goals.

May's trade deficit, although higher than expected, did not display large enough changes in either exports or imports to represent a significant data point in favor of the arguments of either the economic bulls or bears. The trade picture continues to show a moderate-growth U.S. economy, with an improving export performance. Given the numbers' inconclusiveness, look for the stock market to take its cues largely from second-quarter earnings reports due to be released in the weeks ahead.