Widening U.S. Trade Deficit Adds to Fears of Global Economic Slowdown

The widening U.S. trade deficit surprised analysts last week by reaching a level not seen since October 2008, while the decline in exports added to growing evidence of a global economic slowdown.

The U.S. Commerce Department announced last Thursday that the trade gap grew 4.4%, to $53.1 billion from $50.8 billion in May. Economists had expected it to shrink to $48 billion.

Although both exports and imports declined, economists viewed the drop in exports as another sign of trouble for the global economy, which in turn will exert more stress on the struggling U.S. recovery.

The bad news means the government will need to revise second-quarter gross-domestic product (GDP) downward by about half.

"It appears that one of the last fully functioning engines of growth may be faltering," economist Gregory Daco at IHS Global Insight wrote in a note to clients.

Export Weakness

Exports fell for the second straight month, dropping 2.3% from May to $170.9 billion.

While U.S. imports fell by 0.8%, helped by lower oil prices, the decline wasn't nearly enough to offset the much bigger export-drop.

"The real weakness was in exports and that's consistent with slower growth in the rest of the world," Jay Bryson, a global economist at Wells Fargo Securities LLCinCharlotte,North Carolina, told Bloomberg News. "The contribution of exports [to growth] is going to be a little more shaky."

Exports, which make up about 13% of the U.S. economy, have contributed a greater-than-usual share to the recovery. Commerce Department data estimated that exports contributed 0.6% of the second quarter's total 1.3% increase in GDP.

That exports dropped despite a weak dollar, which makes U.S. products cheaper overseas, cast a further pall on the news. A decline in the dollar of 7.8% in the 12 months that ended in July wasn't sufficient incentive for foreign buyers.

The widening U.S. trade deficit also presents another headache for U.S. President Barack Obama, who has said that increasing exports is part of his strategy to revive the economy and create jobs.

"To help businesses sell more products abroad, we set a goal of doubling our exports by 2014 --because the more we export, the more jobs we create here at home," President Obama said in his 2011 State of the Union address.

At their current numbers, U.S. exports have increased by about one-third of where they were in January 2009, when President Obama was inaugurated, but a continued decline will make it much harder to reach the goal of doubling exports by 2014.

The fresh pressure on exports could create renewed urgency for Congress to pass pending free trade deals with South Korea, Panama and Colombia. Those deals have faced opposition from labor unions, who say the deals will cost more jobs than they create and will make the widening U.S. trade deficit even worse.

"All we hear is about the export jobs being created," Robert Scott, international economist for the Economic Policy Institute,told CNN Money. "The problem is they count the home team's score and leave off the visitors' score. The results of other trade agreements have shown these deals tend to result in growing trade deficits with these countries."

The widening U.S. trade deficit added to the stew of other recent negative reports, which has led many analysts to lower their GDP estimates for the rest of 2011. Back in April most forecasts were for growth above 3%; now most see only 2% growth, which is not sufficient to turn the U.S. economy around.

After the report was released, many economists quickly adjusted their growth estimate for the quarter below 1%. Barclays Capital said it had lowered its 2Q GDP estimate to 0.6%.

Economists estimate that every $1 billion added to the U.S. trade deficit shaves 0.1% from the annualized GDP.

"The sharp widening in the trade deficit in June is a stark reminder that the U.S. cannot rely on a sustained boost from overseas to offset the weak domestic economy," Paul Dales, an analyst at Capital Economics, told the Los Angeles Times.

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