The United States in July posted the biggest drop in its trade deficit in 17 months, as imports plunged and exports shot higher, according to a government report that could lift hopes for the economic recovery.
The U.S. trade deficit narrowed by 14% to $42.78 billion from a downwardly revised $49.76 billion the month before, the Commerce Department reported yesterday (Thursday).
U.S. exports expanded 1.8% to $153.33 billion - the highest level since August 2008 - from $150.57 billion in June. Imports registered their biggest decline since February of last year, falling 2.1% to $196.11 billion from $200.33 billion in June.
Overseas shipments could be a vital source of strength for U.S. manufacturers as the world's largest economy tries to sustain a recovery from the worst recession since the 1930s. Demand for imports from abroad may continue to drop as American consumers and businesses cutback on spending in coming months.
While most of the world's other major economies are experiencing fairly rapid recoveries, the U.S. economy has struggled to build momentum. Second-quarter gross domestic product (GDP) was revised downwards to 1.6%.
Meanwhile, China, India and other emerging markets are experiencing solid economic growth, putting the "Great Recession" firmly in the rearview mirror.
Money Morning Contributing Editor Martin Hutchinson maintains that growth in emerging markets will prove to be good medicine for the U.S. economy.
"Rapid world growth will eventually rekindle the economic fires here, producing a growth that is more balanced than the bubbles of 1995-2008," said Hutchinson.
July's trade report, featuring falling imports and surging exports, is just what the doctor ordered, according to Hutchinson, a highly-respected financial consultant who is in the process of launching a new trading service, the Merchant Banker's Alert.
"The United States has a huge advantage when world economic growth is strong, as is currently the case," he says. "With export markets growing faster than domestic consumption, exports will tend naturally to increase faster than imports, producing the most pleasant of all economic states: export-led growth."
The July increase in U.S. exports, including to China, is good news for President Barack Obama's administration, which has hoped healthy foreign demand would help put the U.S. economy back on a strong footing. Obama has set a goal of doubling exports in five years.
The deficit reduction, which followed three straight months of gains, was much bigger than expected. Economists surveyed by Dow Jones Newswires had predicted a $47 billion trade gap.
The report supports the U.S. Federal Reserve's position that while the economy has cooled, it will not fall into contraction. U.S. exports rose to a two-year high, a source of strength for manufacturing, which has been a mainstay of the recovery.
"While the data haven't exactly been robust, they've certainly been healthy enough to suggest that we're not on the cusp of a double dip," or a renewed recession, Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut told Bloomberg News. "We're not firing on all cylinders anymore, but manufacturing is definitely still growing."
Economists David Greenlaw and Ted Wieseman at Morgan Stanley (NYSE: MS) raised their forecast for third-quarter economic growth to 2.4% from 2.1% after the trade figures were released.
Reduced demand for overseas goods could be responsible for slower building of inventories and investment in new equipment at U.S. companies. Orders placed with U.S. factories for business equipment fell 7.2% in July, while sales fell 1%, a Sept. 2 Commerce Department report showed.
While smaller gains in business spending may help limit imports to the United States, the outlook for exports is positive as emerging economies expand.
A report last week showed manufacturing in China grew at a faster pace in August. The gain in the government-backed purchasing managers' index signaled the economy in China is stabilizing after a slowdown.
"On balance, U.S. investors should be optimistic for 2011 and beyond," says Hutchinson. "Rapid global growth should rectify the U.S. balance-of-payments problem, so that even modest fiscal discipline will produce a quickening of U.S. growth rates, and a full economic recovery."
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