By Joshua Newell

WASHINGTON (MNI) – The trade deficit is expected to shrink slightly
in May, mostly due to a large drop in imports, as petroleum prices fell
and the auto sector remains disrupted.

The trade deficit is estimated at $42.7 billion, as projected from
a survey of economists by Market News International. This would be down
from a $43.7 billion deficit in April.

Michael Englund, the chief economist at Action Economics cited
falling petroleum prices combined with a decrease in oil import volumes
as the main reason for the projected shrinking deficit. He expects “a 3
billion dollar drop in petroleum imports, which would account for nearly
the entire fall in imports.”

Englund also mentioned a weak automobile sector having a negative
effect on both imports and exports because the aftermath of the Japan
tsunami continues to disrupt supply chains.

James OSullivan, the chief economist for MF Global, backed this
assessment of the auto sector. He expects “a big drop in auto imports”
to be the main issue in the report.

The May retail sales report supports this evaluation. U.S. retail
sales did fall in May; however, excluding the volatile auto sector,
retail sales actually grew at a 0.3% clip.

Regarding the other side of the trade balance sheet OSullivan
stated, “exports continue to look strong,” as emerging markets grow and
demand from northern Europe remains strong despite the European
financial crisis.

This strong global demand played a key role in the continued
strength of the U.S. manufacturing sector. Durable goods orders rose at
a strong 2.1% rate in May, and overall manufacturing orders increased
0.8%.

Furthermore, the May ISM reports for manufacturing and
non-manufacturing continue to show growth in both imports and exports.
Both releases reported that Imports grew, albeit at a slower pace, while
export growth accelerated noticeably.

The trade balance report will be released Tuesday at 8:30 ET by the
Department of Commerce.

— Joshua Newell is a Washington reporter for Need to Know News

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: MAUDS$,M$U$$$]