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U.S. trade deficit jumps

With the global economy sagging, demand appears to be weakening for American manufactured goods as a drop in exports far exceeded a decline in imports.

August 12, 2011|By Don Lee, Los Angeles Times
  • A rubber tire gantry crane lifts a 40-foot shipping container onto a truck at the Georgia Port Authority?s Garden City terminal in Garden City, Ga. Sales overseas of America?s stalwart manufactured goods ? heavy engines and machines, computer chips and parts ? shrank in June.
A rubber tire gantry crane lifts a 40-foot shipping container onto a truck… (Stephen Morton / Bloomberg )

Reporting from Washington — An unexpectedly sharp jump in the U.S. trade deficit for June to its highest level in three years signals more trouble ahead for jobs, income and economic growth.

With the global economy sagging, demand appears to be weakening for American manufactured goods — one of the few bright spots left in the nation's recovery efforts — as a drop in exports far exceeded a decline in imports.

The trade imbalance rose 4.4% to $53.1 billion in June, the widest since October 2008, the Commerce Department reported Thursday. It was the second straight month of worsening trade numbers.

"It appears that one of the last fully functioning engines of growth may be faltering," economist Gregory Daco at IHS Global Insight said in a note to clients.

The trend was particularly worrisome partly because increased sales abroad of U.S. manufactured products had helped fuel the early stages of recovery from the recession. Also, President Obama and many others had pinned their hopes for a return to prosperity largely on a revival of Americans "making things."

Even the slumping dollar, which has made U.S. goods cheaper and more competitive in foreign markets, wasn't enough to blunt the effects of slowing sales.

Still, investors brushed aside the trade data and instead took heart in another, more immediate report on unemployment: New jobless claims filed last week slipped below 400,000 for the first time since early April.

That report, along with better-than-expected earnings news from companies such as Cisco Systems Inc., helped trigger Thursday's strong rebound on Wall Street.

Yet the implications of the new trade data may outlast current fluctuations in the market by casting a cloud over future profits of major exporting companies, including Cisco, a San Jose producer of computer networking systems.

Sales overseas of America's stalwart manufactured goods — heavy engines and machines, computer chips and parts — shrank in June, as did industrial materials such as cotton and food products. U.S. exports of consumer goods were up slightly over the month, and auto shipments were up slightly. Exports of services were flat.

Total U.S. exports of goods and services in June, seasonally adjusted, dropped 2.3% from May to $170.9 billion.

American imports also dropped in June, thanks to lower oil prices, but the monthly decline was just 0.8% to nearly $224 billion.

"The sharp widening in the trade deficit in June is a stark reminder that the U.S. cannot rely on a sustained boost from overseas to offset the weak domestic economy," said Paul Dales, an analyst at Capital Economics.

Mauro Guillen, a professor at the Wharton School, expects the U.S. trade deficit to narrow should the economy falter. Americans will cut back more on imports, he said, as they did during the recession when the deficit fell sharply.

But if the deficit continues to grow, it would put further pressure on America's budget shortfall as the U.S. would need to borrow more money to support its consumption. What's more, widening trade deficits take away from economic and job growth nationally.

In fact, Thursday's trade data prompted economists to cut their estimates of U.S. gross domestic product growth — the broadest measure of economic activity — to below 1% for the second quarter, from an initial rate of 1.3% generated by the government.

That means the economy barely grew in the first half of this year because first-quarter GDP was up just 0.4% at an annual rate.

Some analysts expect GDP in the second half to expand by 2% or a little more, sufficient for modest job growth to take place but not enough to make a dent in the nation's high unemployment rate.

U.S. manufacturers have added 280,000 net new jobs since early 2010. A big chunk of those jobs have come at companies making capital goods, such as machine tools, industrial equipment and computer chips and accessories.

But many of those products are exported to developed countries in Europe and Canada, where growth is slowing, said Frank Vargo, vice president for international economic affairs at the National Assn. of Manufacturers.

Given the slowdown in exports, Vargo said it was more imperative for Congress to ratify pending free-trade agreements with South Korea, Colombia and Panama. "We've got to move more in rapidly growing markets in South America and Asia," he said.

Obama has urged passage of those long-stalled trade deals, despite opposition from organized labor, as part of a goal of doubling exports in five years. With the latest June figures, exports in the second quarter were running significantly below the pace needed to achieve that goal.

Many American companies have pushed more aggressively into emerging economies such as China, Brazil and India to expand sales. But it's unlikely that they can offset the slowdown in their conventional markets any time soon.

For companies like Cisco, the U.S. and Canada account for about half the sales, but the next biggest share is Europe, said Brian Marshall, an analyst at Gleacher & Co. in San Francisco who follows Cisco and other major high-tech companies.

"We have entered a slower growth period," he said, noting that companies will be reining in their hiring and some other investments to weather the downturn. In the near term, he said, "I think it's a bleak outlook with respect to job creation in the U.S."

don.lee@latimes.com

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