The US trade gap widening and its consequences for investing

Recently some worrying news came throgh the main media channels and I had to apply my economics knowledge again to the reality.

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 various reports are released 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.

The main reasons indicated by the surveyed economists are the increased fuel and travelling costs. This has lead to serious measures on most of the US companies, consisting in trimming jobs in order to reduce payroll and postponing investments in productive and non-productive equipments.

I don’t know how do you read these news folks, but we at doitinvest.com feel the recession train coming. Companies are desperate to reduce costs in order to maintain profitability, whilst more and more expensive goods are purchased from outside US. In the last 20 years, the US economy has switched to a services one and producing abroad has become the norm, rather than the exception, especially for the low value added products (mostly from the FMCG). Obviously the US economy is now highly dependant on cheap imports, which are not any longer…cheaper. So expect some inflation in the form of higher rising costs.

This also makes (or better said maintains) the US dollar very weak. It’s no surprise that 1 USD = 0,63 EUR today, from a parity of 1-1 on the launch year of the Euro (2000). This also means that the forex markets are very volatile nowadays, with no coming back to be foreseen soon for the US dollar value. Anyhow, whomever will guess WHEN the dollar will turn around (and will bet on this) will make a hell of a lot of money, I am pretty sure about this.

So be prepared for a tough ride in the next 6 months, my investing colleagues!

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