On Friday the Commerce Department reported that the trade deficit in goods and services fell by 500 million dollars to 58.4 billion dollars in February. Typically, a fall in the trade deficit is good news. A lower trade deficit means that a smaller amount of what is being consumed domestically is produced overseas.
However, Friday’s report shows that the decline in the trade deficit mainly took place due to a substantial downturn in imports of industrial supplies and materials. Since these imports are intermediate products that are used as inputs into finished products, the decline in imports is more a signal that the U.S. economy (especially business spending on investment) is slowing. At the same time, the fact that imports of consumer goods continued to rise is positive news that overall consumer spending remains healthy. This is critical for the state of the current expansion given the fact that exports of capital goods fell as well in February.
If the current expansion is going to post a healthy gain in 2007, it is critical that the trade sector be a significant contributor to growth. Last week’s report does not offer too much reassurance that the expansion remains on track.
Next week, the Commerce Department reports on retail trade on Monday as well as industrial production on Tuesday as well as the leading economic indicators on Thursday. Given the fact that consumer spending is almost 70 percent of the U.S. economy, Monday’s report on retail sales will give a good indication with respect to the state of the consumer mid-way through the first quarter.