Bloomberg, getting a jump on next week’s news, tells us that expectations for the Commerce Department’s report on the US trade deficit, due on July 11, is that it got worse. In general, increasing current account deficits (of which trade is the biggest component) put downward pressure on currencies. But our nasty conundrum is that the rise in the gap is due to rising price tags on commodities imports, notably oil. A depreciating dollar only makes matters worse.
From Bloomberg:
The U.S. trade deficit probably widened and the cost of imported goods jumped, underscoring how the surge in oil prices is hurting growth and igniting inflation, economists said before reports this week.The gap between imports and exports grew to $62.4 billion in May, the widest in almost two years, according to the median estimate of economists surveyed by Bloomberg News. The import- price index climbed 2 percent last month, the poll showed.
Increasing fuel expenses indicate companies will keep cutting payrolls and trimming equipment purchases to maintain profits. At the same time, more expensive foreign goods will open the way for U.S. businesses to also raise prices, signaling inflation may not ebb as the Federal Reserve projects.
Yves here, I don’t buy the latter view at all, that companies will put through price increases beyond what they really need to. A weakening economy does not give merchants pricing power. Food producers have taken margin hits to avoid subjecting consumers to the full impact of their cost increases, and food purchases are not elective (although particular items are and therefore subject to substitution). Similarly, apparel retailers are offering deep discounts now, well ahead of schedule, due to shoppers pulling in their horns. We will still have an inflation problem until commodities prices stabilize, but I don’t see domestic producers raising prices due to weakened import competition.
Back to Bloomberg:
The increase in petroleum was a primary reason for the widening of the trade gap in April. After eliminating the influence of prices, the trade deficit shrank that month to the lowest level since August 2003, as exports grew. The after- inflation trade numbers are the figures used to calculate gross domestic product…..The import-price index is the first of three monthly inflation gauges released by the Labor Department. Economists projected the measure would be up 18.6 percent from June 2007, according to the survey median. It would be the biggest 12-month gain since records began in 1982.
The government is scheduled to report wholesale prices on July 15 and consumer prices the following day…
Other reports this week may signal the risks to growth aren’t letting up. Pending home resales fell 2.5 percent in May, economists project a report from the National Association of Realtors on July 8 will show. The figures are based on contract signings, making them a leading indicator of actual purchases, which are tabulated when a deal is closed a month or two later.
Separate but related is an excellent post by Tim Duy, who is sufficiently agitated about the state of affairs to have written on holiday with access only to dial up. It contains some instructive stories about how some individuals made unconventional, prescient readings of changing economic circumstances, and worries about the prospects for US consumption ultimately supported by foreign central banks.
I may be wrong, but I think there is an increasing, inchoate sense that we are on the verge of a tipping point (I see (Duy’s urgent need to post on vacation as an indicator). I probably can’t speak for other gloomsters, but even though I have long thought It Would All End Badly, I still get a sinking feeling when I look over the cliff and see how far down down might be. While I see lots of reasons to expect terrible outcomes, part of me reminds myself that we have muddled through disasters somehow and typically managed to avoid the worst. But can we assume this time won’t be different?
And when we have triggers, like big declines in the stock market, that sense of peril is worse (and mind you, I am positioned to profit from that sort of day!). But as more people start to look over that cliff into the chasm that I have studied from time to time, I think more and more of the public at large is getting a sense of how far the fall might be. And most people are constitutional optimists, so that line of thinking is probably more upsetting to them than to folk like me.
I may be placing too much faith in that collective barormeter of animal spirits, the stock market. Normally, after a month as bad as June, you’d expect some sort of reversion (indeed, Barry Ritholtz has called for one). And last week may have been distorted by the July 4 holiday. But looking at the trading in the US, several attempts to rally (admittedly some on dubious pretenses, but what’s new about that?) petered out.
I am wondering whether investors are too shell-shocked to get out at current levels and are looking for a rally either to sell into or to validate a decision to stand pat. If an upward move looked to have any sign of conviction, some would revert to form and start bottom fishing. But I wonder what happens if another bear market bounce is not forthcoming.
Richard Kline 
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I realize that the price of oil has been increasing, but then, so has the price of wheat, soybeans, and corn, major American exports.
While oil pricing plays a major role in American import deficits, the increase in exports due to rising grain prices is simply glossed over.
The trade numbers are likely to be really, really bad – reflecting the reality of a transformation over a generation in which Americans have proudly turned themselves into a nation of consumers.