July 13, 2010

U.S. Trade Gap Widens in May; Budget Deficit Shrinks in June, but Still Above $1 Trillion

Imports at highest level in two years as budget shortfall persists for 21 months

U.S. economic reports released Tuesday, July 13, showed that the trade deficit grew in May to more than $42 billion and the federal government ran a budget deficit of $68 billion in June.

The trade deficit, at its widest gap in nearly two years, rose on higher imports of consumer goods. The budget deficit, while still massive at a little more than $1 trillion for the first nine months of fiscal 2010, stood at $68 billion in June, 27% less than the same time a year ago.

Imports rose to $194.5 billion versus exports of $152.3 billion, the U.S. Census Bureau said in its foreign trade report for May. The $42.3 imbalance is the largest since November 2008, when the trade gap stood at $43.8 billion.

Analysts, whose consensus figure for May was $39 billion on the heels of April's $40.3 billion, were taken by surprise by the trade report.

"With the oil imports declining by $1.3 billion, all the damage was in the core. Exports and imports both rose, continuing the trend of the past year or so, but the level of imports is so much higher than that of exports that the latter need to generate much bigger percentage increases just to keep the deficit steady. The reverse was true in May so the non-oil deficit jumped by a hefty $4.8 billion," said Ian Shepherdson, chief U.S. economist for High Frequency Economics Ltd., in Valhalla, New York, in an analyst note.

Consumer goods showed the greatest import growth, $2.6 billion higher than in April. The trade gap with China rose to $22.3 billion from $19.3 billion. American exports to China rose 2.5% compared to imports of 12%.

Meanwhile, the U.S. Treasury's June budget deficit figures give Washington politicians on both sides of the aisle plenty of fodder for argument. The deficit represents the 21st month of consecutive budget shortfall, and yet this June's figure is markedly lower than last year's number.

"The June budget deficit came in at $68.4 billion, down from $82.7 billion in April of this year and $94.3 billion in June 2009," wrote analysts in a report from New York-based Jefferies Economics. "The consensus call was for a deficit of $69 billion, while deficit estimates were in a range of $62 billion to $103.9 billion. Earlier this year, the February $220.9 deficit was the record for a single month's deficit."

The Jefferies report also noted that June tax receipts rose 16.6% to $251.1 billion, up $35.7 billion from June a year ago. Calendar effects, Fed profit repatriation and improved payroll and income taxes helped to boost receipts. Lower spending for TARP, Fannie Mae, and Freddie Mac, was offset by other outlays.

Read a story about Federal Reserve Chairman Ben Bernanke's thoughts about the deficit from the archives of InvestmentAdvisor.com.
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