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Shrinking trade gap bodes well for U.S. economy

August 09, 2013

Vanguard's Economic Week in Review

Record exports in June and continued strength in domestic oil production provided positive signs for economic growth, enough to have some economists revising the second-quarter gross domestic product (GDP) estimates reported last week. Service-sector growth also rebounded while demand for consumer credit slipped from the prior month.

For the week ended August 9, 2013, the S&P 500 Index was down 1.1% to about 1,691 (for a year-to-date total return—including price change plus dividends—of about 20%). The yield on the 10-year U.S. Treasury note was down 6 basis points to 2.57% (for a year-to-date increase of 79 basis points).

U.S. trade gap narrows

The nation’s trade deficit contracted sharply in June, paced by record monthly exports and weaker demand for imported oil. The shortfall narrowed to $34.2 billion—the lowest figure since October 2009—in a sign of both stronger demand for American-made goods and increased domestic oil production. Exports rose 2.2% from May to $191.2 billion, the sharpest increase since September 2012, while imports dropped 2.5%, sending the overall trade gap down by 22.4%. June’s petroleum deficit was $17.4 billion, the lowest since August 2009, while exports of capital goods reached an inflation-adjusted high of $46.2 billion.

Increased exports of American-made capital and consumer goods, industrial supplies, and materials offset a slight drop in auto exports. Analysts suggested that increasing global appetite for U.S. products and more robust domestic oil production could be a good sign for the U.S. economy, though overall domestic demand is still sluggish.

"The narrowing trade gap bodes well for a potential upward revision to the initial 1.7% estimate of second- quarter GDP growth when the second estimate is released at the end of this month," said Vanguard economist Andrew J. Patterson. "In their initial estimate, economists at the Bureau of Economic Analysis had estimated growth in exports and imports to be lower and higher, respectively, than those figures reported in this most recent release."

Service sector rebounds

The ISM Non-Manufacturing Index jumped to 56.0 in July from June's 52.2. Results above 50 indicate expansion, and this was the 43rd consecutive monthly increase. Business activity paced the gain at 60.4, followed by new orders at 57.7. The employment index eased back to 53.2, causing some concern about the job market, but the figure still exceeded 50. Exports and backlogs slid below 50, offset by the 60.1 result for prices paid for purchased materials and services.

The service sector constitutes the majority of U.S. economic activity, and taken with last week's increase in manufacturing, both numbers are an encouraging sign.

ISM indexes

Consumer credit up, but by less

Consumer credit rose in June by $13.8 billion, fueled once again by demand for auto and student loans but below May's revised increase of $17.5 billion. Analysts suggested that strong auto sales may return to prerecession levels by year's end as consumers continue to take advantage of low financing rates. Nonrevolving credit balances increased by $16.5 billion, up for the 22nd consecutive month, even as revolving balances fell by $2.7 billion. The report reflects an ongoing trend of households reducing their credit-card debt.

The economic week ahead

Reports pick up the pace next week, beginning with retail sales and business inventories on Tuesday and the Producer Price Index on Wednesday. Thursday brings reports on the Consumer Price Index and industrial production. The week concludes Friday with nonfarm productivity and new residential construction.

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
August 5 ISM Non-Manufacturing Index (July)
Source: Institute for Supply Management
56.0 53.0 +4 bp –0.1%
August 6 U.S. Trade Balance (June)
Source: Commerce Department
–34.2 billion –$43.5 billion 0 bp –0.6%
August 7 Consumer Credit (June)
Source: Federal Reserve Board
+$13.8 billion +$15.0 billion –6 bp –0.4%
August 8 Initial Jobless Claims (week ended August 3)
Source: Labor Department
333,000 336,000 –3 bp +0.4%
August 9       –1 bp –0.4%
      Weekly change –6 bp –1.1%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.

Notes

  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
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