Trade Balance Expands as Fed Turns Soft

July 7, 2016United Statesby EW News Desk Team

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Federal Reserve chiefs are reversing course on America’s economy as the country’s trade deficit widens with foreign nations.  In May, the trade balance deficit rose 9.9% to $41.1 billion, far above expectations as exports fell and imports rose. Total imports were up 1.6% from the prior month, indicating America’s continued dependence on foreign production to meet domestic demand.

The increasing trade deficit runs counter to government policy, as President Barack Obama’s recent aggressive pushes for more free trade pacts and deals with Asian, North American, and European counterparts have been sold to American workers as a way to boost foreign demand for American goods and services.

That foreign demand has failed to materialize, with economists warning that declining global growth and weakness in emerging markets due to low commodity prices will hinder the growth of foreign middle classes, who are the biggest consumers of American products outside of the U.S.

Several official economic policies continue to push large trade agreements. The controversial Trans-Pacific Partnership (TPP) followed several bilateral deals with Asian nations executed in the 2000s and early 2010s, such as a free trade agreement between America and South Korea.

That agreement, known as KORUS FTA, passed the U.S. Senate in 2011 as policymakers heralded it as a major win for American manufacturers. Since then, however, America’s trade deficit with South Korea has widened as Americans continue to buy significantly more Korean products per capita on a dollar cost basis than their South Korean counterparts.

While the expansive TPP promises to not make the same mistakes of KORUS FTA, growing dissent with FTAs has given rise to political discussions of more protectionist economic policies, helping fuel the rise of presidential candidates Bernie Sanders and Donald Trump, who have both argued for more aggressive protection of American workers vis-a-vis their foreign counterparts.

Dour Fed Goes Dove

Federal Reserve heads have thrown in the towel, abandoning earlier confident pronouncements of a resurgent U.S. economy. The Federal Open Market Committee (FOMC), comprised of Fed chiefs, admitted in their June meeting that America’s labor market is in trouble. "Almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market,” the FOMC said.

At the same time, the Fed noted GDP growth is accelerating significantly after a sluggish first quarter. "The information reviewed for the June 14–15 meeting indicated that the pace of improvement in labor market conditions slowed in April and May but that real gross domestic product (GDP) appeared to be rising faster than in the first quarter,” the FOMC said in its meeting.

The Fed failed to explain the disconnect between labor markets and broad GDP growth, but emphasized that it will not be looking at a rate hike until the market has improved.

Most crucially for the Fed, several labor data points suggest that workers’ bargaining power in the labor market has declined as employers fail to hire more aggressively and provide better working conditions for Americans. "Over the first two months of the second quarter, both the labor force participation rate and the employment-to-population ratio moved down on net.

The share of workers employed part time for economic reasons rose noticeably in May. Although the rate of private-sector job openings remained elevated, the rate of hires declined in both March and April and the rate of quits was unchanged,” the FOMC said.

A weak labor market has been the focus of several fringe economists.  They argue that America’s income inequality gap is creating an economy in which growth comes not as a rising tide for all Americans, but at the expense of workers who are increasingly squeezed by globalization, automation, and a fiscal policy that fails to distribute economic gains to displaced workers.

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