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Ballooning trade deficit adds another obstacle for deposit rates

September 05, 2013

| MoneyRates.com Senior Financial Analyst, CFA

New figures from the Commerce Department show that the U.S. trade deficit widened in July. While a widening trade deficit isn't necessarily bad news for growth, the mixed messages in the latest trade report only add to the pervading sense of uncertainty that hangs over the economy.

The latest trade figures

The U.S. trade deficit widened by 13.3 percent in July, to $39.1 billion. This was a reversal from the recent trend, which saw the deficit drop to a three-and-a-half year low in June.

Since imports represent a subtraction from Gross Domestic Product (GDP) and exports represent an addition, a trade deficit creates a net reduction in GDP. However, a trade deficit is not necessarily indicative of a weak economy, since a jump in imports may reflect strong domestic demand that can carry over to consumption of U.S. goods as well. Imports did indeed rise, but any optimism about domestic demand that this might inspire is offset by a drop in exports.

Exports to the European Union fell by 7.4 percent in July, and exports to China fell by 4.9 percent. Given the budget and trade deficits in the U.S., growth in demand from other countries is needed to lift the U.S. out of the mediocre growth rates of recent years. This drop in demand from the European Union and China, which pushed the trade deficits with both areas to record highs, is a discouraging aspect of the latest trade figures.

Another example of a mixed message in the trade figures is the record high in U.S. petroleum exports. While this is a boost to U.S. exports, it is also a manifestation of the rising global demand for petroleum. Recent unrest in Syria and Egypt are the latest reminders of the instability that can result when the petroleum supply is threatened.

Interest rates hang in the balance

The continuing ambiguity of economic growth trends leaves the future of interest rates hanging in the balance. Rates on savings accounts and other deposits have yet to budge from their near-zero levels, though current mortgage rates are about a full percentage point higher now than they were in early spring. Naturally, banks have more of an incentive to raise the rates they charge on loans than the rates they pay on deposits, and the longer-term nature of mortgages make them more forward-looking anyway. However, even the rise in mortgage rates appears to have paused, waiting for clearer signals before going on.

What the trade deficit figures have in common with much of the economic data released this year is that they represent a mixed message. This lack of clarity in economic results is consistent with an overhanging mood of uncertainty this year. Between questions over the effect of government sequestration, the implementation of Obamacare, and most recently possible U.S. involvement in Syria, uncertainty seems to be the dominant theme for 2013. Unfortunately, uncertainty has never been a good foundation for economic growth.

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