The trade deficit (ex-oil) was thought to be on a downward trajectory.    

But after today’s data, that argument may need to be reconsidered.

I have been a bit more cautious than most in predicting the “turn” in the trade deficit. 

That was for two reasons.

First, I wasn’t sure that non-oil goods imports would stay flat at around $127-128b for the entire year.  This month’s data suggests that the economy hasn’t slowed enough to end  all import growth.    Non-oil goods imports rose to $130b.   Barring the recession Nouriel is now forecasting, I would expect non-oil imports to continue to trend up over the course of the year. 

Second, I wasn’t convinced that the very strong growth in US exports that propelled monthly goods exports from $75b a month last summer to around $85b a month now (and pushed goods and services exports up from $106b a month to $120b a month) could continue for ever.   It now seems that the pace of export growth has slowed somewhat. Exports have been stuck at around $120b for the past three months, bouncing up in June and back down in July.

In some sense, conditions were perfect – or almost perfect – for US exports over the past 12 months.  Demand for civil aircraft outside the US was very robust (and demand for aircraft in the US was very low, freeing up all of Boeing’s production for export).    Global growth was very strong.  And in one key part of the world – Europe – that growth was driven by domestic demand.  The lagged impact of the dollar’s 2004 fall was helping US firms gain market share -- particularly in product areas where US production competes with European production.   And even with something of a rebound in 2005, the dollar was clearly much weaker than it had been in 2001-02.    

In sum, conditions were perfect for a surge in US exports.   And that was what happened.    My concern all along has been that things were more likely to get worse than better.   Plus, Boeing’s export capacity looked pretty maxed out – at least until 787s start rolling off a new production line.