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US Trade Deficit Tightens

Today’s U.S. reports revealed a faster than expected deterioration in the U.S. trade deficit through June to a new all-time high, but also a sharp tightening in continuing claims in the most recent week, alongside a small drop in initial claims in the final week of July. For trade, the service surplus narrowed due to a huge 3.8% gain for service imports, while the goods deficit widened by more than seen in the advance report. The services surplus is proving slow to reverse course following deterioration with the pandemic, and the inventory rebuild is lifting goods imports. We now expect no net revision in the 6.5% Q2 GDP growth figure, and we still expect 7.0% GDP growth in Q3. We also still expect a July nonfarm payroll gain of 600k.

  • Goods and services exports rose 0.6%, following a 0.9% (was 0.6%) May gain.
  • Goods and services imports rose 2.1%, following a 1.3% May gain.
  • In “real” terms, goods exports fell -0.7% and goods imports rose 1.0%, leaving a gap of -$105.2 bln.
  • Initial claims fell -14k to 385k, after falling -25k to 399k (was 400k).
  • Continuing claims fell -366k to a 2,930k new cycle-low, after last week’s 34k rise to 3,296k (was 3,269k).
  • The insured jobless rate sat at a 2.4% cycle-low for a fifth week, after a 2.5% prior cycle low over the previous four weeks.
  • The Langer consumer comfort index ticked up to 53.3 in the first week of August from 53.2, versus a 52.5 average in July.

Trade Balance

The U.S. trade deficit widened by more than expected to a -$75.7 bln new cycle-high in June from -$71.0 (was -$71.2) bln in May, versus two prior all-time highs of $75.0 bln in March and $70.6 bln in February. Imports beat our estimate by $1.0 bln, while exports fell -$0.3 bln short, leaving the wider gap. We assume the trade deficit will narrow in late-2021 after “topping” through Q2 at all-time highs thanks to a rebound in international travel that will allow recovery in the U.S. service trade surplus. Goods imports will remain elevated with inventory restocking, however, after a massive liquidation over four of the last six quarters.

We saw June goods and services gains of 0.6% for exports and a hefty 2.1% for imports, after respective May gains of 0.9% (was 0.6%) and 1.3%. The service surplus narrowed to $17.4 bln from $18.1 (was $17.9) bln due to an unexpected large 3.8% gain for service imports alongside a 1.5% service export gain, while the goods deficit widened in July by more than seen in the advance report, to -$92.1 (was -$91.2) bln from -$88.1 (was -$88.2) bln.

For June trade in petroleum, imports rose $0.6 bln to $17.4 bln while exports popped $2.3 bln to $17.8 bln, leaving a small surplus in June that caps deficits in three of the prior four months, following a 13-month string of surpluses between January of 2020 and 2021.

The vehicle sector trade figures diverged in June, with a 1.7% rise for exports but a -2.4% (was -2.5%) drop for imports, after respective pullbacks of -4.6% and -0.6% in May, and -7.9% and -3.5% in April. These figures have been hit hard by disruptions from semiconductor shortages.

We saw a -$27.8 bln June bilateral goods balance between the U.S. and China, versus a $26.3 bln deficit in May, and a -$43.1 bln all-time wide bilateral gap in October of 2018.

We now expect no net revision in the 6.5% Q2 GDP growth figure, with hikes of $1 bln for exports and $5 bln for imports, following previously assumed boosts of $6 bln for factory inventories and $2 bln for nonresidential construction, but downward bumps of -$1 bln for residential construction and -$2 bln for public construction.

We expect Q3 GDP growth of 7.0% with a net export subtraction of -$26 bln, following an estimated Q2 subtraction of -$36.9 (was -$32.9) bln. We expect export growth of 4% in Q3 after an estimated 6.2% (was 6.0%) Q2 pace. We expect import growth of 5% in Q3 after an estimated 8.4% (was 7.8%) in Q3.

We expect the current account deficit to widen to a new 14-year high of -$198.3 bln in Q2 from a prior 14-year high of -$195.7 bln in Q1 and a 12-year high of -$175.1 bln in Q4. We saw a low in the last recession of $87.1 bln in Q2 of 2009, and a $218.4 bln all-time high deficit in Q3 of 2006.

We expect the annual current account deficit to widen to a 15-year high of $794 bln in 2021 from a 12-year high of $616 bln in 2020. We saw a prior record-high gap of $817 bln in 2006.

We expect 2021 goods and services growth rates of 18%-20% for exports and imports. We saw respective 2020 contraction rates of -16% and -10%. We saw near-flat figures for both in 2019 after big 6%-8% gains in 2018, as trade was “pulled forward” into 2018 from 2019 due to tariff front running.

Initial and Continuing Claims

The -14k initial claims drop to a largely expected 385k in the last week of July extended last week’s -25k drop to 399k (was 400k) from an 11-week high of 424k in the BLS survey week, versus a 368k cycle-low seen in both early July and late-June. The big news came from continuing claims, which plunged -366k to a 2,930k new cycle-low, after last week’s 34k rise to an upward-revised 3,296k (was 3,269k) from a prior cycle-low of 3,262k. The insured jobless rate fell sharply to a 2.1% new cycle-low, from a 2.4% prior cycle-low over the prior four weeks. Today’s figures add to the view that bad July seasonal factors due to atypical vehicle retooling explain the recent deterioration in claims.

  • Initial claims averaged 393k in July, following prior averages of 394k in June, 428k in May, and 582k in April.
  • The 424k July BLS survey week reading exceeded the 418k June figure, but it undershot prior survey week readings of 444k in May, and 566k in April.
  • Continuing claims fell by a restrained -116k between the June and July BLS survey weeks, after drops of -199k in June, -42k in May, -188k in April, and -628k in March.

Our July nonfarm payroll forecast sits at 600k, following a 543k average gain thus far in 2021. The rise is consistent with GDP growth of an estimated 6.6% (was 6.5%) in Q2 and 7.0% in Q3. Our forecast tracks solid 2021 production and retail sales gains, a continuing claims downtrend, a housing boom, and robust sentiment. ADP posted a lean 330k gain in July however, and vehicle sales fell -4.1% to a 14.8 mln clip alongside an assumed 5% bounce in the assembly rate to 9.4 mln, as vehicle makers struggle with semiconductor shortages.

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