Trade/Budget Deficits Shrink, Import Prices Rise on Oil, Job Market Healthy

- The Trade Deficit for August shrank to -$57.6 Billion versus estimates of -$59.0 Billion and -$59.0 Billion in July.

- The Import Price Index for September rose 1.0% versus estimates of 1.0% and a .3% decline in August.

- Initial Jobless Claims for last week fell to 308K versus estimates of 315K and 320K the prior week.

- Continuing Claims fell to 2521K versus estimates of 2550K and 2536K prior.

- The September budget surplus rose to $111.6 billion versus estimates of $100.7 billion and $56.2 billion in August.

BOTTOM LINE: The US trade deficit narrowed more than forecast in August as exports climbed to a record for the sixth consecutive month, Bloomberg reported. According to most economists, record exports will prevent the economy from slipping into recession even as the housing slump persists. A cheaper dollar is also boosting gains in tourism to the US. The nation’s surplus in services grew to a record $9 billion, as a result of travel. The trade deficit with China narrowed 5.4% as American companies exported a record $5.9 billion worth of goods. I expect the trade deficit to only improve modestly over the intermediate-term as energy price declines more than offset better US growth relative to other developed nations.

Prices of goods imported into the US rose in September as costs for oil jumped to a record, Bloomberg reported. Prices excluding oil fell .2%, the largest drop since October 2006. “This drives home the point that weakness in the dollar is not a huge inflation risk,” said Doug Porter, an economist at BMO Capital. The costs of imported capital goods were unchanged. Prices of Chinese goods rose .2%. I expect import price increase to decelerate meaningfully over the intermediate-term as energy prices fall as other product price increases remain muted.

The number of US workers filing first-time claims for unemployment benefits fell more than forecast last week, showing the labor market remained resilient heading into the fourth quarter, Bloomberg said. The four-week moving-average of jobless claims fell to 310,250 from 313,250 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, remained steady at a historically low 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

The US government posted the smallest budget deficit in five years as tax revenue reached a record and spending rose at a slower pace, Bloomberg reported. Total government spending rose 2.8% for the year, compared with an average annual increase of 6.8% since 2001. Revenue from tax receipts rose 6.7% in 2007, helping cut the budget deficit by 33% from the prior year. Corporate tax receipts rose 4.6% during the year. US military and social security spending rose 6.1% for the year, while spending on Medicare and Medicaid rose 9.4%. I expect the budget deficit to continue to fall meaningfully over the intermediate-term.