U.S. Sees Higher Trade Deficit, Lower Services Activity

American trade policy is failing to shrink the trade deficit with other countries as weak demand crimps services industries throughout the country.  The trade balance between the United States and foreign countries rose 3.4% on a month-over-month basis in April, rising to $57.5 billion; however, that also represents the lowest trade deficit since February 2015.

American trade policy is failing to shrink the trade deficit with other countries as weak demand crimps services industries throughout the country.  The trade balance between the United States and foreign countries rose 3.4% on a month-over-month basis in April, rising to $57.5 billion; however, that also represents the lowest trade deficit since February 2015.

Total exports rose in April to $119.3 billion, with capital goods remaining the largest portion of exports, at 37% of total exports. Thanks in part to a resurgent U.S. dollar, imports rose to $176.8 billion, with consumer goods and capital goods accounting for more than half of the total imports.

Weak Services

As the deficit rises, America is also suffering a decline in demand for services. The May Purchasing Managers Index (PMI) for services fell to 51.2, barely showing expansion. That is against expectations of an increase to 53.2 from April’s reading of 52.1.

The study, commissioned by Markit Economics, noted a significant decline in incoming new work for businesses, as economic pessimism caused investment to fall. “The latest expansion of new business intakes was only modest and one of the weakest recorded since the survey began in late-2009. Some firms commented on a cyclical slowdown in investment spending and continued unwillingness among clients to commit to new projects,” Markit Economics said in their report.

The study also saw a fall in business optimism as input prices rose, causing costs for businesses to rise at their fastest rate since July 2015.

Markit’s Chief Economist Chris Williamson was extremely negative about the study’s results, noting that the survey indicates that weak growth in the first quarter may be bleeding into the second. “A deterioration in the survey data for May deal a blow to hopes that the US economy will rebound in the second quarter after the dismal start to the year,” he said.

Williamson also noted that the study suggests that job growth will remain weak in May, after dismal growth for the first four months of 2016. “A deteriorating order book situation and waning business optimism have meanwhile led to a further pull-back in hiring as companies scaled down their expansion plans. The surveys are signaling a non-farm payroll rise of just 128,000 in May,” he said.

This may not move the Federal Reserve to restrain borrowing costs for businesses and consumers, however. St. Louis Federal Reserve President James Bullard warned that the outlook for a summer rate hike was strong, noting that the labor market was extremely robust. “I think we are at or beyond full employment in the U.S., so in the labour market side, that’s probably the strongest argument for going ahead and making a move,” he said.