U.S. Trade Gap Widened in December

Daily Forex Fundamentals | Written by RBC Financial Group | Feb 10 12 15:10 GMT The trade deficit increased to $48.8 billion in December 2011; downward revisions showed $47.1 billion deficit in November and $43.0 billion deficit in October. Exports rose 0.7% while imports increased at a stronger 1.3% pace. The trade gap widened slightly less than assumed by the Bureau of Economic Analysis (BEA) in its initial estimate of fourth-quarter 2011 real GDP, and along with smaller deficits in the previous two months, this is likely to result in the drag from net exports being less than 0.1 percentage points in the advanced release. Our tracking of the economy points to real GDP growth being revised to show a 3.2% annualized gain from the 2.8% in the advanced report. The improved momentum in the US economy was sustained in early 2012 according to January 2012 reports; however, with the unemployment rate still elevated, the Fed will keep policy extraordinarily stimulative.

Exports rose 0.7% in December 2011 following declines of 1.0% in November and 0.7% in October. December's rise was broad based with only consumer goods, ex-autos, and capital goods, ex-autos, showing weakening of the major sectors. Exports of vehicles and parts posted a solid 6.1% increase. Imports posted 1.3% rise in December with gains in all major components except food and feeds, which dipped by 1% in the month. Imports of crude oil rose 6% as the average price for a barrel of oil jumped to $104.13 from $102.50 in November while the volume of petroleum imports dipped 0.9% in the month.

Excluding the effect of prices, the real trade balance (in chained 2005 dollars, Census basis) widened to -$47.7 billion from a revised -$47.0 billion in November. This reflected 1.4% increase in the volumes of both exports and imports.

The December trade deficit was smaller than assumed by the Bureau of Economic Analysis (BEA) and November and October's deficits were revised lower thereby pointing to a moderation in the drag on growth from net exports in the final quarter of 2011. Looking ahead, while there is evidence that Europe's economy has stabilized, activity is running at low levels and risks to the European economy remain to the downside. Chinese trade data showed a sharp drop in imports in the month of January 2012 although some of this likely represents the fact that the Lunar New Year trimmed the number of workdays compared to a year earlier; however, the decline indicated that trade activity moderated even if it proves temporary. While the external environment is showing signs of weakness, the US domestic economy is showing signs of improved momentum. Other data reported for December showed that construction activity was stronger than assumed by the BEA, and inventory building by wholesalers was also firmer. On balance, this supports an upward revision being announced to fourth-quarter 2011 growth to 3.2% from 2.8%.

Labour market conditions strengthened, and both the manufacturing and services sector's Purchasing Managers Indices (PMI) posted gains in January. These data are consistent with import demand accelerating in the first quarter of 2012. Export demand is at risk of facing near-term downward pressure; however, we expect that the euro zone will emerge from a short-lived recession and that China will avoid a hard landing, resulting in more robust gains in US export growth in the second half of the year. While the condition of the US economy is improving, there remains significant slack, and it will take considerable time before the economy is operating at full employment. The Fed announced that it expects to keep the policy rate at the lower bound until at least late 2014 in order to provide consumers, businesses, and investors with a clearer picture of the trajectory of interest rates.

 

RBC Financial Group

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.