Tuesday, July 13, 2010

Good And Bad Aspects Of U.S. Trade Report

The U.S. trade deficit increased again in May 2010 to $42.3 billion, the highest level since November 2008, and much higher than the May 2009 level of just $24.9 billion. It is however still a lot lower than the all time high of $66.4 billion in July 2008.

The good part about this is that total trade flows (both exports and imports) are increasing, suggesting a more bullish view of economic activity than suggested by other reports.

The negative part about this, apart from the accounting identity effect on GDP given a certain level of domestic demand, is that the adjustment of imbalances in the U.S. economy could be reversing as households are saving less even though government continues with its massive spending.

Furthermore, an increased trade deficit in the U.S., combined with an increased surplus in China, increases the risk of trade war.