This from Bloomberg August 11, 2010 (highlighting added):
The trade deficit in the U.S. unexpectedly widened in June to the highest level since October 2008 as consumer goods imports rose to a record and exports declined.
The gap grew 19 percent to $49.9 billion in June, Commerce Department figures showed today in Washington. A $42.1 billion deficit was projected by economists, according to the median forecast in a Bloomberg News survey. Imports climbed 3 percent, while exports dropped 1.3 percent, the most since April 2009.
Increased business investment and consumers who are still spending are helping sustain the U.S. appetite for merchandise made abroad. At the same time, growth in emerging economies such as China may cool, limiting shipments abroad that have benefited companies such as Caterpillar Inc. The figures signal trade subtracted more from second-quarter gross domestic product than previously estimated.
Two Points I’d make:
One: The recent relative strength of the US Dollar compared to other currencies has made imported goods more attractive from a price standpoint. Conversely, US exports to other countries have, for the most part, become less attractive from a price perspective.
This is not helpful for a US economic recovery.
Two: Declining Gross Domestic Product is one of the primary factors in determining whether or not we’re in for the dreaded “double dip” recession. A widening trade deficit decreases GDP. Not good.
Meanwhile, former Federal Reserve Chair, Alan Greenspan has gone public on NBC’s “Meet the Press” stating a “double dip” is possible, especially with a further decline in housing prices. The former Fed chairman added the economic recovery was currently experiencing a “pause” that felt a lot like a quasi-recession.
Greenspan also remarked that the deficit was a huge concern, stating the funding of continued tax cuts and additional spending with borrowed money is “disastrous”. For this reason, Greenspan stated he was in favor of allowing the Bush tax cuts to expire.
Here’s the potential problem. Few of our elected officials have the guts to step up and say no more deficit spending since the result of fiscal restraint is economic pain for the masses for awhile. Whether the deficit is closed through spending cuts, tax increases, or a combination of both, all of these remedies are short term bad news for the economy.
Bottom line: In my opinion, we’ll be forced to ‘take our medicine’ at some point in time. I expect the politicians to continue to try to solve the economic problems the way they previously have so expect more of the same results. Unfortunately, economically speaking, I expect an eventual hard landing that may not be far off.
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