July International Trade, August UI Claims, Beige Book, ECB

Trade Gap Narrows, Providing Lift to Q3 GDP

  • The U.S. International Trade gap narrowed in July to -$44.8 billion, after bulging in May and June.
  •  Initial Claims for Unemployment Insurance gained 2,000 to hit 414,000 for the week ending Sept. 3.
  • The Federal Reserve’s Beige Book for August showed signs of weakening activity in some districts.
  • The European Central Bank kept key interest rates unchanged today, but cited increasing downside risks.

The U.S. international trade gap narrowed by more than expected in July to -$44.8 billion after widening to a post-recession maximum of -$51.6 billion in June. The better-than-expected trade numbers for July will provide some lift for Q3 GDP, suggesting that the balance of risk to our forecast of 1.7 percent real GDP growth for Q3 is now to the upside. The July trade gap narrowed as total imports declined slightly by $0.5 billion while exports rebalanced, increasing by $6.2 billion for the month. If the trend toward moderating imports continues this could mitigate some of the potential boost to Q3 GDP by resulting in slower inventory accumulation. Given the recent perturbations to global trade balances due to the Japan earthquake and to oil price fluctuations, the July trade gap improvement does not necessarily suggest that a sustained improvement to net exports is set in train. The recent historical pattern is for a widening U.S. trade gap during expansions as consumers demand more oil and imported goods.

The picture for U.S. labor market conditions did not get any clearer with today’s unemployment insurance claims report. For the week ending September 3, initial claims increased by 2,000 to hit 414,000, amounting to little more than noise coming at a time when the data is being buffeted by hurricanes, floods and summer-end effects. In order to believe that the economy is gaining some lift we need to see signs of a meaningful decline in initial claims later this month. Wednesday’s Beige Book, a survey of the 12 Federal Reserve Districts, indicated modest growth in August in some districts, including the Dallas District, with notes of mixed or weakening activity in other districts.   Chicago reported a slower expansion. Richmond and Philadelphia reported weaker activity.  Auto sales supported consumer spending.  Most districts reported slower manufacturing activity, while energy activity generally expanded with gains expected to continue in coming months.  Extended heat and dry weather affected Midwestern and Southern districts’ agricultural activity, while Hurricane Irene caused retail sales disruptions across the Northeast in late August. The European Central Bank today stuck to their single inflation-fighting mandate and kept key interest rates unchanged while acknowledging increasing downside risks to growth.

Market Reaction: U.S. equities opened soft but are recovering. Treasury yields are down at both ends of the yield curve. Oil is up to $89.50/barrel. The dollar is up against the yen and the euro.

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