Trade Gap Probably Widened, Import Prices Rose: Economy Preview

By Courtney Schlisserman

July 6 (Bloomberg) -- The U.S. trade deficit probably widened and the cost of imported goods jumped, underscoring how the surge in oil prices is hurting growth and igniting inflation, economists said before reports this week.

The gap between imports and exports grew to $62.4 billion in May, the widest in almost two years, according to the median estimate of economists surveyed by Bloomberg News. The import- price index climbed 2 percent last month, the poll showed.

Increasing fuel expenses indicate companies will keep cutting payrolls and trimming equipment purchases to maintain profits. At the same time, more expensive foreign goods will open the way for U.S. businesses to also raise prices, signaling inflation may not ebb as the Federal Reserve projects.

``It is becoming untenable for policy makers to ignore the mounting threat of rising prices at home,'' Joseph Carson, director of global economic research at AllianceBernstein in New York, said in a note to clients. Inflation from overseas ``gives U.S. firms the added flexibility of passing along cost increases to consumers without undermining their competitive position.''

The Commerce Department is scheduled to release the trade report on July 11. The Labor Department will issue June import- price figures at the same time.

The price of crude oil futures has risen 50 percent this year and reached a record $145.85 a barrel on July 3.

The increase in petroleum was a primary reason for the widening of the trade gap in April. After eliminating the influence of prices, the trade deficit shrank that month to the lowest level since August 2003, as exports grew. The after- inflation trade numbers are the figures used to calculate gross domestic product.

`Elevated' Prices

``The improvement in the trade balance has been one of the few factors keeping the economy from contracting,'' said Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania. This week's data are ``going to show that inflationary pressures remain elevated.''

The U.S. economy expanded at a 1 percent annual pace in the first quarter, capping the weakest six months of growth in five years. Trade contributed 0.8 percentage point to the quarter's growth rate.

Employers cut payrolls for a sixth month in June, bringing the total number of jobs lost so far this year to 438,000, according to a Labor Department report last week. The jobless rate was 5.5 percent, matching May's reading as the highest in almost four years.

The jump in fuel costs and loss of jobs have contributed to a slump in consumer confidence that threatens to undermine spending, which accounts for more than two-thirds of the economy. A temporary boost from the government's tax rebates has helped to keep Americans shopping.

Record Rise

The import-price index is the first of three monthly inflation gauges released by the Labor Department. Economists projected the measure would be up 18.6 percent from June 2007, according to the survey median. It would be the biggest 12-month gain since records began in 1982.

The government is scheduled to report wholesale prices on July 15 and consumer prices the following day.

On June 25, Fed policy makers kept the benchmark overnight lending rate at 2 percent and warned that the risk of inflation was rising. Still, they forecast prices would ``moderate later this year.''

``Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters,'' the Federal Open Market Committee also said in a statement in Washington after its two- day meeting.

'No Easy Task'

``For the Fed, navigating through this inflationary environment will be no easy task as it seeks to balance between conflicting goals of reviving growth and restraining price pressures,'' said AllianceBernstein's Carson.

Other reports this week may signal the risks to growth aren't letting up. Pending home resales fell 2.5 percent in May, economists project a report from the National Association of Realtors on July 8 will show. The figures are based on contract signings, making them a leading indicator of actual purchases, which are tabulated when a deal is closed a month or two later.

Bloomberg Survey

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Release Period Prior Median
Indicator Date Value Forecast
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Pending Homes MOM% 7/8 May 6.3% -2.5%
Whlsale Inv. MOM% 7/8 May 1.3% 0.7%
Cons. Credit $ Blns 7/8 May 8.9 7.5
Trade Balance $ Blns 7/11 May -60.9 -62.4
Import Prices MOM% 7/11 June 2.3% 2.0%
Import Prices YOY% 7/11 June 17.8% 18.6%
U of Mich Conf. Index 7/11 July P 56.4 55.5
Federal Budget $ Blns 7/11 June 27.5 30.0
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To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net
Last Updated: July 6, 2008 00:01 EDT