Exports and imports decline
The international trade deficit on goods and services narrowed modestly in April to $32.2 billion from March's $33.1 billion shortfall. Exports fell for the second straight month while imports fell for the second time in three months. The chart below shows the yearly change in exports and imports. Exports are now 1.2 percent below year ago levels; imports are only 1.4 percent higher than a year ago. Actually, a close look at the trade deficit over the past year shows that the deficit peaked eight months ago and is headed lower, albeit at a snail's pace.

The declining export sector bodes poorly for U.S. manufacturers and matches the downward trend evident in industrial production. A decline in U.S. exports means weaker production at home. That translates into fewer jobs and less income for U.S. consumers. At the same time, a decline in imports bodes poorly for economies overseas. When U.S. consumers spend less money on goods and services, foreign producers rather than domestic producers take the first hit.

However, a drop in import demand is usually accompanied by slower economic activity. To some extent the decline in import demand reflects the moderation in oil prices which first surged a couple of years ago. But it also reflects the fact that economic activity is moderating in the U.S.; we're simply spending less money on consumer and capital goods. Surprisingly, the drop in capital goods is much steeper than the decline in consumer goods, which have only just peaked recently. In the 1980s, imports of consumer goods were rampant. The fact that capital goods imports are drying up suggests that the correction in the economy is concentrated in business equipment and manufacturing. The consumer sector, while more moderate than a year ago, still is showing fairly good signs of life.

Will domestic production ever improve?
The Philadelphia Fed's business outlook survey improved in June to a level of -3.7 from -8.8 in May. Any level below the zero line means that manufacturing activity is still declining. Yet, notice that the business outlook survey bottomed out in January and the rate of decline has moderated since then. This index tends to move in the same direction as the index of industrial production. Consequently, it suggests that industrial production will probably decline again in June. It could, in fact, very well decline for a couple more months. Yet, if the Philadelphia Fed index follows its current trend, we may start seeing better manufacturing activity by autumn.

Housing sector holds

Housing starts edged down 0.4 percent in May to a 1.622 million unit rate after gaining 2.3 percent in April. Starts of single family homes inched 0.2 percent lower in May after jumping 7 percent in April. As one can see from the chart below, housing starts bottomed out in July last year but have improved over the past ten months as mortgage rates declined. Given the turmoil in the stock market coupled with an anemic manufacturing sector, it is amazing that the housing market has held up so well. While housing activity certainly is sensitive to changing interest rates, it is affected by income and job conditions. Housing starts have risen even as the unemployment rate has increased in the past several months.

While we're not going to see the gangbuster movement of the late 1990s, the recent upward trend in housing starts could benefit furniture and appliance sales in coming months. It is questionable, however, whether housing starts will continue to move higher as mortgage rates are now up from their lows.