U.S. Trade Deficit Widens, But Signals A Healthier Economy

The U.S. trade deficit expanded at its fastest pace in more than ten years in July, accelerated by rising oil prices and increased demand for auto parts and industrial supplies.

The gap between imports and exports rose 16% - the largest percentage increase since February 1999 - to $32 billion in July from a revised $27.5 billion in June that was larger than previously reported, the Commerce Department said. After eliminating the influence of prices, which are the figures used to calculate gross domestic product (GDP), the trade gap widened to $38.8 billion from $35.8 billion.

Imports surged 4.7% to $159.6 billion, fueled by an increase in oil prices and strong demand for industrial materials. Crude oil prices rose to an average $62.48 a barrel from $59.17 in June. And imports of capital goods, which include cars and auto parts, jumped to $30.2 billion from $28.9 billion.

The government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” was the driving force behind the increase rising demand for capital goods. The program fueled a 1.8% increase in durable goods spending for the month, as sales of cars and light trucks rose to an annual pace of 11.2 million units in July - the most since September 2008. The gain in auto imports was probably even bigger in August when car sales surged to an annual rate of 14.1 million units.

The rise in imports far outpaced the increase in exports, which rose just 2.2% to $127.6 billion. That, too, was the result of greater demand for capital goods and industrial supplies - particularly in China.

Despite the worsening in the overall trade gap, the U.S. trade deficit with China narrowed to $20.42 billion in July from $25.03 billion in the same month last year.

“China is back,” Alcoa Inc. (AA) Chief Executive Officer Klaus Kleinfeld said in an interview with Bloomberg News. “They had a lot of shovel-ready projects” planned for 2011 that starting now as part of the country’s stimulus effort.

Alcoa last week raised its 2009 forecast for global aluminum consumption because of demand unleashed by China’s $586 billion (4 trillion yuan) in stimulus package.

China’s economy grew by 7.9% in the second quarter, exceeding most analysts’ expectations, and lending credence to Beijing’s goal of 8% annual growth.

U.S. exports to the rest of the world are expected to rebound in the months ahead as the global economy inches toward recovery.

“The outlook for U.S. exports is becoming increasingly positive,” wrote Michael Feroli, an economist for JP Morgan Chase & Co. (JPM). “Foreign economic growth has returned.”

U.S. trading partners grew at a 4% annual rate in the second quarter on a trade-weighted basis, Feroli noted.

Trade has been one of the few bright spots in the economy throughout the recession, contributing 1.6 percentage points to second-quarter GDP, helping to make up for declines in consumption and investment. Total U.S. GDP contracted 1% last quarter.

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