Merk Investments: Trade Deficit
Trade Deficit To -$58.21bln
The US Trade deficit for the month of March declined to -$58.21bln on the back of the weakest month of demand for imports in nearly six years. Ex-petroleum the deficit fell to -$59.627bln or -5.7%. Total exports declined -1.7% and total imports dropped -2.9%. On a real adjusted basis, the goods balance eased to -$47.204bln, the ex-petroleum declined to -$40.777bln, exports fell -4.4% and imports dropped -5.4%.
The politically sensitive series of bilateral trade deficits marginally improved with the trade deficit on the Pacific Rim falling to -$22.846bln and the deficit with the EU expanding to -$7.144bln. The trade deficit with China recorded its second consecutive monthly decline, falling to -$16.078bln, which was the smallest in nearly two years. The improvement in the trade balance, driven by the adjustment in the value of the dollar during Q1’08 implies that ex-trade the economy contracted during the first three months of the year. In an election year, we do hope that this important development is not lost in the greater political discussion among our public actors and the media.
Under normal circumstances a decline in the real adjusted trade balance and the improvement in the overall picture for output would be a cause for a positive reaction in the market. However, the data inside the March trade report suggests that the rapid rise in headline inflation has sharply reduced the appetite of US consumers for goods and services across the board. While the current account balance has seen improvement, we do not see this as dollar positive in the near term. The data does strongly imply that the rise in headline inflation is reducing the purchasing power of domestic consumers. With Americans only marginally improving overall savings, the evolution of the economy does not support some of the more bullish calls that have become fashionable of late for the dollar to stage a near term rally. From a policy perspective the weak dollar policy pursued by the administration is a failure. Debasing the currency is not a panacea for what ails the US economy and in fact, is part and parcel of the current inflation problem that will not recede anytime soon.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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