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Posted: January 03, 2011

The economy’s picking up speed

One sign: a shrinking trade deficit

Jeff Thredgold

The U.S. trade deficit with the rest of the global community shrank in October to its lowest level in nine months, one more sign that the American economy is slowly picking up speed. The net difference between American exports and imports declined to $38.7 billion in October, better than consensus expectations. The trade deficit was $44.6 billion in September.

U.S. exports to the world jumped 3.2 percent to $158.7 billion in October, the highest level since August 2008. Imports dipped 0.5 percent to $197.4 billion.

Perhaps contrary to common belief, the trade imbalance does not just measure the difference between "merchandise" or "goods" exported out of and imported into the U.S. It also includes a smaller component of "services," including financial services, insurance, travel, professional services, etc. The U.S. typically runs a trade deficit in goods or merchandise and a surplus in services.

A Lofty Goal

The Obama Administration has announced a goal to double U.S. exports to the world over the next five years. While this is a noble and desirable objective, you can take it to the bank that every other nation on the planet has identified a similar goal.

The Administration and the Federal Reserve have drawn criticism around the world that both institutions are following a "cheap dollar" policy to boost U.S. exports to the world. The theory is that a weaker U.S. dollar relative to other major currencies leads to lower global prices for American-made goods and services, while also making imports into the U.S. more expensive. As usual, the Administration and the Federal Reserve each indicate support of a "strong dollar" policy.

Chinese Pressure

China remains under enormous global political pressure to allow its currency to rise in value as a means of reducing its enormous trade surplus with the world. While the Chinese have allowed modest currency appreciation in recent years, many feel that their currency, the yuan (which does not float or trade openly in global foreign exchange markets), is still 20-40 percent undervalued.

China, now the world's largest exporter, runs an enormous trade surplus with the U.S. Despite record American exports to China in October, the two nations ran a $226.8 billion trade surplus in favor of the Chinese during 2010's first 10 months, up more than 20 percent versus the same period a year ago. Additional U.S. and global political pressure on the Chinese to boost their currency's value will remain center stage for years to come.

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The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is www.thredgold.com/html/leaf.html.
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