The U.S. trade deficit narrowed by 4.1% to $56.8 billion in June on record exports and a decline in non-oil imports, the Commerce Department estimated Tuesday.
The balance of trade has been declining for nearly two years, the result of the dollar slipping in value against other global currencies as well as weaker demand at home.
Exports have been keeping the economy afloat, as consumer spending, business investment and housing investment have slumped. Indeed, net exports contributed more to GDP in the second-quarter than at any time in the past 28 years.
Exports have been one of the few very bright spot in the US economy over the last few years. However, there are problems developing for that area of the US economy:
The euro-zone economy shrank in the three months from April to June, its first quarter-to-quarter contraction since records began in early 1995.
After a surprisingly strong start to the year, the economies of the 15 countries that share the euro succumbed to the global credit crunch, high oil prices and a strong currency.
Figures published Thursday by the European Union's statistics agency, Eurostat, showed euro-zone gross domestic product fell 0.2% from the first quarter, and rose 1.5% from a year earlier. That marked a sharp reversal of the 0.7% rate of growth recorded in the three months from January to March, but was stronger than expected. Economists surveyed by Dow Jones Newswires last week estimated that GDP shrank 0.3% on a quarter-to-quarter basis and grew 1.5% on an annualized basis.
"Sharp reversals" in GDP indicate there are some strong fundamental changes going on -- none of them good.
Also note this news from Japan:
Japan's economy shrank for the first time in a year in the April-June quarter, confirming fears that the world's second-largest economy has entered a slump at the same time as some other major countries.
Gross domestic product, the widest measure of economic activity, fell 0.6% from the previous quarter on a seasonally-adjusted basis, the government said early Wednesday. That translates to an annualized rate of decline of 2.4%, and it represents the first quarterly contraction in a year.
The decline was the largest in nearly seven years, coming as rising prices of energy, food and raw materials hit consumers and corporations. Many Japanese companies are suffering from higher costs of materials at the same time as their sales decline around the world, and they are responding by cutting production. Japan is particularly vulnerable to higher energy prices, as it relies nearly entirely on imported oil.
Note that prices played a huge deal for both areas. As oil drops the situation might change for the better. Also note that with the euro dropping, European exports could increase helping to ameliorate the negative impacts of slowing export growth (of course, that leads to the question of who would buy the goods? Do emerging markets still need European goods?).
Finally, if the US dollar continues to increase will that stifle the export story?