Trade Gap Expands As Economy Underperforms Already Low Expectations

Uh-oh.

June exports fell far more than economists expected, even as imports rose. That's yet another sign the already weak economy is underperforming even our scaled-back assumptions.

The new figures from the Commerce Department show that the trade gap— the difference between what we buy from overseas, and what we sell there— widened to $49.9 billion in June. That's a 21-month high. Economists had been expecting something more like $43 billion.

Those numbers indicate the economy likely grew even less in the second quarter than the sluggish 2.4% reported a couple of weeks ago. Now the Commerce Department will probably end up revising that figure downward.

 

The troubling part was where exports fell. The drops ranged from capital goods, like steelmaking supplies and semiconductors, to consumer products, like apparel and household goods.

That means the manufacturing sector, until now the hero of the economy, might not be chugging along as well as we thought. The Labor Department recently said manufacturing added 36,000 jobs last month and 183,000 so far this year. The country desperately needs factories to keep growing to help the overall economy.

Meanwhile, a rising trade gap with China will increase pressure on Washington to get China to revalue its currency, which many people believe is undervalued. A low yuan contributes to the trade gap, making it harder for U.S. firms to compete with cheap Chinese products. The trade gap with China rose to $26.15 billion, compared to $22.8 billion in May.

Separately, reports from China on industrial production and capital spending indicated growth in that country is slowing, further bad news for the global economy.

Overall U.S. exports fell to 1.3% to $150.45 billion, from $152.44 billion in May. Meanwhile, imports rose 3.1% to $200.35 billion from $194.42 billion. President Obama has said he wants to double exports in the next two years as a way to create 2 million jobs.

For a roundup of informed opinion on what, if anything, governments with trade deficits should do to boost exports, see this report in the Economist.