International trade was back in the news again this week, and we're not referring to the old furor over NAFTA or Congress' intransigence on the free trade pact with Colombia. Instead, data released on Thursday showed a larger-than-expected widening of the trade deficit during February. On a positive note, goods exports increased to yet another record high. Through the first two months of 2008, real exports of capital goods and industrial supplies have increased roughly 12 percent when compared to the same two-month period last year. Solid global economic growth and a generally deflationary trend for the dollar have bolstered the case for U.S. exports. Export trade has served as a backstop for the broader economy as growth takes a hit from the housing market fallout and the credit crunch.
While the outsized increase in the U.S. import bill should not be a concern in and of itself, the report highlighted one of the potential problems with a depreciating currency: import price inflation. Historically, after excluding volatile movements in petroleum from the import bill, import prices presented much less of a threat to inflationary pressures here in the United States. More recently, domestic manufacturers have seen prices for industrial supplies rise by double digits, and even import prices for consumer goods, which up to this point have been shielded to some degree, finished the quarter appreciably higher. The impact of rising import prices on U.S. inflation is not clear, but their potential to stoke inflation remains a concern for the Fed-despite their putting the subject on the back-burner and worrying more about overall growth.
Of course, consumers are less likely to feel the full brunt of import price inflation immediately since consumer spending is expanding at its weakest pace in years. Chain-store sales, even allowing for the extremely early Easter holiday, were not good and many retailers have already put out warnings (subscription required) not to expect miracles in the near term.