U.S. Trade Deficit Surges

The Commerce Department reported Wednesday that the U.S. trade deficit increased to $49.9 billion in June from $42.0 billion in May. What's it mean for the economy and the state of the recovery? Diane Swonk gives us her take.
-Nelson Wang
Chinese Moves Spur Imports
Much of the increase in the trade deficit could be attributed to a sharp rise in imports from China, as producers scrambled to stockpile cheap steel and other goods ahead of a repeal in the tax credit that China provides for many of its export products. The move, which went into effect on July 15, was intended to reduce excess capacity in key sectors in China by forcing inefficient plants to close. The Chinese are also hoping that efforts to remove export subsidies will alleviate calls for increased protectionism from the U.S. China has also begun to appreciate its currency relative to the dollar, but the process has been glacial, to say the very least.

The stockpiling of Chinese goods should slow now that the subsidies have been removed. Preliminary data out of China on the month of July, however, suggest we will have to wait until August for any noticeable change.

Exports Hold Up
Exports held up fairly well in June, supported by strong exports to the developing economies, largely China. (Are you seeing a theme here?) There is some concern that exports will slow, particularly to China, which has also been a large buyer of our goods, now that it has made moves to cool its domestic economy. Indeed, the same preliminary trade data in July that showed that Chinese imports likely remained strong during the month also showed some cooling in exports.
GDP Revisions Likely
Real GDP for the second quarter will be revised down significantly, probably closer to 1.5 percent than the 2.4 percent initially reported. That is assuming that at least part of the surge in imports shows that we have seen shows up in an offsetting increase in inventories. Otherwise, revisions to the second quarter could be even worse. Some of that weakness will carry into the fourth quarter. The trade situation, however, could easily reverse course and improve again by year end as Chinese goods rise in price.

Diane Swonk, chief economist at Mesirow Financial, talks to CBS MoneyWatch twice a week about the day's top economic news and developments. Her responses are edited for clarity and length.