Our latest survey of over 800 businesses in 12 states indicates that the nation’s trade deficit is likely to continue to grow at a record pace in the months ahead. Despite a cheap U.S. dollar making imported goods more expensive and exported goods less expensive, firms report increasing growth of imports with an April import index of 59.3, up from March’s 57.1 and little change in export orders with an April new export orders index of 53.6, up only slightly from March’s 53.0. An index of above 50.0 indicates expansion while an index below 50.0 points to contraction. With growth in imports exceeding exports, the nation’s trade deficit is likely to remain at record levels in the months ahead with the monthly deficit rising above $60 billion for the third consecutive month when the U.S. Bureau of Economic Analysis releases the March deficit on May 11 and the April number on June 3.
What accounts for the lack of self-correcting in the deficit? That is, a cheapening of the value of the dollar should encourage greater exports and declining imports. However, Americans continue to consume oil, a large share which is imported, despite rapidly rising prices for gasoline and other oil-related products. Furthermore, America’s trading partners, particularly Europe and Japan, are experiencing economic growth at approximately one-fourth that of the U.S. Lethargic economies don’t demand rising imports even with lower prices.
For those of you out there traveling to Europe this summer, you are going to be paying more for less. You could instead visit China where the government links their currency to the U.S. dollar. Thus, those large trade deficits with China won’t reduce the value of your tourist dollar in Beijing, or anywhere else in this vast nation. The question for policymakers is, when will China tire of investing their acquired U.S. dollars in the American Treasury? That time will come and usher in a period of rapidly rising long-term interest rates for the American consumer.