Driver of Economic Growth Slows as Exports of U.S. Goods Fall

By Rom Badilla, CFA

October 12, 2012

The U.S. Trade deficit gapped further amid slumping global demand. According to the U.S Department of Commerce, the U.S. Trade Balance widened $-44.2 billion in August from the revised prior period reading of -$42.5 billion. The August figure widened more than market expectations since the median of forecasts by economists was at -$44.0 billion.

On an inflation-adjusted basis, the trade deficit was more pronounced. The trade goods balance worsened to -$-48.4 billion from -$47.0 billion in July.

The deterioration in the trade deficit is attributable to a fall in exports of U.S. goods to markets abroad. Exports dropped 1% for the month to $181.3 billion which follows a 1.1% fall in the previous month. Conversely, imports came in at $225.5 billion, a slight move lower of -0.1% which marks the fifth straight monthly decline.

Deutsche Bank’s Chief Economist, Joseph LaVorgna added the following color on the recent fall in U.S. exports.

We have been tracking the export trend, because external demand has played an important role to this point in the economic cycle. Export growth has steadily decelerated from +15.1% year-on-year in August of last year to +2.7% in July and now +1.6% in August. The export trend is following the lead of the new export orders component of the ISM, which has been running below 50 (consistent with contraction) for four consecutive months.

The recent fall in exports reinforces the current trend that growth for U.S. goods are turning downward which is not a good sign for the economy. Given that global growth is slipping as evident by the recent weak economic figures from both in China and in Europe, the U.S. economy will need other drivers such as increases in consumer spending and business investment in order to maintain current economic growth rates. Unfortunately, the recent data for these two drivers have been lackluster. This in turn reinforces continued sub-par growth for the U.S. economy which should keep interest rates relatively low for the time being.

According to Trade Monster’s Bond Trading Center, U.S. Treasuries are rallying slightly with interest rates falling. The yield on the current 10-Year U.S. Treasury is lower by a basis point to 1.67%.

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