This morning the U.S. Bureau of Economic Analysis announced that the U.S. trade deficit climbed to $58.3 billion in January, the second-highest level in history, as Americans' appetite for foreign consumer products and automobiles hit record highs. The deficit with China was pushed higher by a surge in textile shipments, reflecting the end of global quotas. These continuing trade deficits put downward pressure on the value of the dollar as more dollars flow abroad.
I expect the trade numbers to continue to be dismal. The latest surveys of supply managers and business leaders in the 12 states that Creighton University surveys each month point to solid growth, but with rising trade deficits for the first three quarters of 2005. Creighton has conducted the monthly survey of 1,800 firms to produce leading economic indictors for the two survey regions and 12 states for more than 10 years. Indices over 50.0 indicate expansion while readings below 50.0 indicate contraction.
To see survey results go to: www.outlook-economic.com
A cheap U.S. dollar making U.S. goods less expensive abroad has been a real boom for companies in the region. On the other hand rapid declines in the value of the dollar, making foreign goods more expensive in the U.S., have yet to restrain imports. For example, in February, firms reported increases in imports with a February reading of 60.6, up from 58.6 for January and a downturn in new export orders to 55.3 from January’s 58.1. Our survey indicates that the region and the nation will continue to experience high trade deficits contributing to further weakening in the dollar.
Despite February’s jump in imports and pullback in export growth, I expect the trade picture to improve, but not until later in the year as higher oil prices continue to push imports higher until mid-year. Around mid-year, I expect firms to increasingly turn to domestic suppliers as import prices rise even higher. However, even with the improvement, the trade deficit will continue to place downward pressure on the U.S. dollar. If you are going to travel abroad this summer, you might should consider pre-paying your expenses, or exchanging your dollars for Euros, Yen ,etc. now. The dollar is not likely to rebound in the short term or intermediate term especially if the Chinese decouple their currency to the dollar. Also if you are buying from abroad, buy now before the prices for foreign goods rises even more. That French wine is only going to get more expensive in the months ahead.