U.S. Trade Deficit Narrows, Some Positives Seen

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Includes: CMI
by: Codespeed

The United States Commerce Department announced on Wednesday that the trade deficit or gap shrank 3.8%, to $48.7 Billion in May, on par with market expectations. Falling oil prices and softened demand in the U.S. possibly due to lack of effective job growth helped in lowering the import bill.

According to the Trade Deficit report, the United States trade deficit fell slightly in May thanks to a slight rise in exports - quite surprisingly Europe and China bound exports.

Thoughts - What are the Positives and Negatives?

Except for the most recent Factory Orders figures, most of the economic indicators including the ISM Manufacturing Index that came out in the past couple of weeks have been dismal. Wednesday's report though has some positives:

  1. Nominal exports posted a slight gain - exports of goods and services posted a 0.2% gain.
  2. Exports to Europe improved very slightly as well; surely a recovery considering earlier month's horrendous double digit decline.
  3. Imports in the capital goods and automotive (vehicles and parts) sector increased in May.
  4. Exports to China increased 5.2% in May, however this is lesser compared with the 6% gains in January-May 2012 period.

However, these figures do not post a completely rosy picture. The negative implications are discussed below:

  1. There was a decline in consumer goods imports. This shows that consumer confidence continues to be in pressure and consumption could remain constrained for Q3.
  2. In spite of a very slight nominal gain, exports to Europe will continue to face challenges with the U.S. dollar increasing and the ongoing recessionary environment in the eurozone.Remember, foreign exchange volatility and a rising dollar already cost, along with the sluggish global growth already caused Cummins (NYSE:CMI) to lose its entire 2012 revenue growth. The company plunged almost 10% on Tuesday.
  3. According to the report, if you adjust for price changes, both exports and imports of goods fell.

Conclusion

Wednesday's report shows both sides of the coin, but one thing was clear - the narrowed deficit tends to ease the panic of a massive slowdown a bit.

The biggest relief for now is that (at least) as of May, the eurozone mess is not leading to a trade collapse.

And the biggest concern still remains if this slightly positive export activity will sustain itself for the next three months, especially with the softening demand in China and the still unresolved Europe mess.

Disclosure: I am long CMI.