U.S. Trade Deficit Shrinks; GDP Outlook Bright

Includes: AGG, DIA, FXE, SPY
by: Judith Levy

The U.S. trade deficit beat expectations by narrowing in June on record exports, appearing to confirm the Fed's supposition that global demand for American products will cushion the economy from the ill effects of the housing slowdown. "The economy needs something to step up and lead it forward and it looks like the export sector has become that savior," said economist Joel Naroff. The surprising deficit result could result in an upward revision of Q2 GDP above its current 3.4% estimate, possibly above 4%. The trade gap slimmed in June by 1.7% to $58.1 billion from a revised $59.2 billion in May, though the deficit with China widened. The deficit is running at an annualized rate of $705.5 billion, 7% below last year's record $758.5 billion figure. Last week, Fed policymakers cited increased employment and strong global demand to justify their forecast of "moderate" economic growth. In June, exports rose 1.5% to $134.5 billion on sales of petroleum products, semiconductors and cars. Exports of services, foods, industrial supplies and cars all set records. Imports also set a record at $192.7 billion. Foreign demand for U.S. products is being spurred by strong growth abroad -- China, for example, expanded 11.9% in Q2 from the previous year -- as well as the state of the dollar, which has weakened 7% since the beginning of 2006.

Sources: Bloomberg, MarketWatch, Business Week, Wall Street Journal
Commentary: The U.S. Economy: Business As Usual?Trade Deficit Narrows Sharply on Record ExportsMonthly Budget Surplus Second-Highest Ever, But Trade Deficit Widens Over 10% [May 11, 2007]
Stocks/ETFs to watch: SPY, DIA, AGG, FXE.

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