U.S. Economy Demanding Fewer Imports

August 19, 2008--The international trade balance narrowed in June as the weak U.S. economy is demanding fewer imports. Prices rose again in July, as the Consumer Price Index rose and elevated energy prices were passed along to consumers. With fewer government rebate checks to spur shopping, retail spending fell in July. Industrial production rose slightly in July as mining and manufacturing posted small gains.

 

International Trade
According to the Bureau of Economic Analysis, the U.S. trade deficit in goods and services narrowed unexpectedly to $56.8 billion in June, down from $59.2 billion in May. Both exports and imports increased in June, at 4.0% and 1.8%, respectively. Oil imports, specifically from OPEC, continue to cripple the U.S. trade balance. In June, imports from OPEC nations increased 6.8% and the trade deficit with OPEC nations rose to $18.1 billion. The weak dollar is driving exports while sluggish growth at home is hindering imports. Overall growth will remain timid or even turn negative during the remainder of the year, thus, the trade balance should continue to narrow.

 

Consumer Price Index
The Consumer Price Index (CPI) rose 0.8% for the month in July, after increasing 1.1% in June. As expected, the single largest increase was in energy prices, as they surged 4.0% in July, though, that represents a deceleration in growth, as energy prices rose 6.6% in June. Food inflation also increased in July, as prices rose 0.9% for the month. The core CPI, which excludes food and energy prices, inched up 0.3% for the month. On a year-ago basis, the top-line CPI has increased 5.5% while the core CPI is up 2.5%.  Inflationary concerns may lead the Fed to take corrective action shortly, though, given the weak economy at the moment, raising interest rates may hamper a recovery. 

 

Retail Sales
In July, total retail sales declined 0.1%, after an upwardly revised gain of 0.3% in June (originally reported as a 0.1% gain). Slow sales at auto dealers (-2.4%), restaurants (-0.2%), and sporting goods stores (-0.2%) were the only drags on growth, but were large enough to send total retail sales into negative territory. Nonstore retailers (+1.1%), furniture stores (+1.0%), and gasoline stations (+0.8%) posted the strongest gains in July. Core sales, which exclude sales made at gasoline stations and auto dealerships posted a 0.3% increase. On a year-to-year basis, top-line retail sales increased 2.6%, while core sales are up 3.4% for the year. The trend for weak or negative growth should remain in the near term, as consumers have spent their stimulus checks, and as higher food and energy costs, a weak labor market, the housing crisis, and the credit crunch continue to discourage spending.

 

Industrial Production
Industrial production increased 0.2% in July. Previously, in June, industrial production rose 0.4%. Mining and manufacturing both increased, at 0.9% and 0.4%, respectively. Utility output, however, fell 1.9%. Capacity utilization inched upward and now stands at 79.9%. With continued weakness in residential investment, auto production, and throughout the broader economy, expect industrial production to remain weak this quarter.