July gets third-quarter net exports off on the back foot. The goods and services deficit swelled to an as-expected $78.8 billion from June's $73.0 billion as a 0.5 percent gain in exports to $266.6 billion was dwarfed by a 2.1 percent jump in services to $345.4 billion.

The goods deficit swelled by $5.6 billion in July to $103.1 billion while the offsetting surplus in services came to only $0.2 billion at $24.3 billion. For goods, exports of vehicles and parts fell $1.7 billion with passenger cars down $1.3 billion; exports of consumer goods fell $0.8 billion with gem diamonds down $0.7 billion; exports of capital goods, however, rose $1.8 billion with semiconductors up $1.7 billion. For services, exports rose $0.6 billion to $91.5 billion led by financial services up $0.2 billion in the month.

Turning to imports, capital goods rose $3.3 billion driven by a $2.4 billion increase in computer accessories (though a negative for the trade balance, rising imports of capital goods are a positive for US business investment and productivity). Imports of industrial supplies rose $2.8 billion that included a $1.1 billion rise in nonmonetary gold. Looking at imports of services, charges for intellectual property rose $0.5 billion with transport up $0.3 billion and travel down $0.3 billion.

Net exports of goods and services pulled GDP lower in both the first and second quarters this year with, following July's results, a third straight quarter of trouble in the works. Also signaling trouble is Econoday's Relative Performance Index which has fallen to minus 24 to indicate that recent economic data are coming in below Econoday's consensus estimates.

A deficit of $78.8 billion is expected in July for total goods and services trade which would compare with a $73.1 billion deficit in June. Advance data on the goods side of July's report showed a stalling out for exports and a steep $6.1 billion rise in the deficit.

Updating the goods portion of the advance report and offering initial data on services, this report provides complete information on cross-border trade. Merchandise trade is available by export, import and trade balance for six principal end-use commodity categories and for more than one hundred principal commodity groupings. Data are also available for 48 countries and 7 geographic regions. Detailed information is reported on oil and motor vehicle imports. Services trade is available by export, import and trade balance for seven principal end-use categories.

Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect the value of the dollar in the foreign exchange market.

Imports indicate demand for foreign goods and services here in the U.S. Exports show the demand for U.S. goods in countries overseas. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States, since this trade imbalance creates greater demand for foreign currencies. The bond market is also sensitive to the risk of importing inflation. This report gives a breakdown of U.S. trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.

Importance
The international trade balance on goods and services is the major indicator for foreign trade. While the trade balance (deficit) is small relative to the size of the economy (although it has increased over the years), changes in the trade balance can be quite substantial relative to changes in economic output from one quarter to the next.

Interpretation
Market reaction to this report is complex. Typically, the smaller the trade deficit, the more bullish for the dollar. Also, stronger exports are bullish for corporate earnings and the stock market.

Both the level and changes in the level of international trade indicate relevant information about the trends in foreign trade. Like most economic indicators, the trade balance is subject to substantial monthly variability, especially when oil prices change. It is more appropriate to follow either three-month or 12-month moving averages of the monthly levels.

It is also useful to examine the trend growth rates for exports and imports separately because they can deviate significantly. Trends in export activity reflect both the competitive position of American industry and the strength of domestic and foreign economic activity. U.S. exports will grow when: 1) U.S. product prices are lower than foreign product prices; 2) the value of the dollar is relatively weaker than that of foreign currencies; 3) foreign economies are growing rapidly.

Imports will increase when: 1) foreign product prices are lower than prices of domestically-produced goods; 2) the value of the dollar is stronger than that of other currencies; 3) domestic demand for goods and services is robust.

The international trade report does show bilateral trade balances with our major trading partners. Since the value of the dollar versus various foreign currencies does not always move in tandem, we can see a narrower or wider trade deficit with different countries. In the 1980s and 1990s, the U.S. trade deficit with Japan often caused political problems. During the next 20 years the deficit with China began to grow rapidly and, like Japan, once again caused political problems. While American consumers benefit from weak imports, American workers often lose their jobs as these goods are no longer produced in the United States. Ideally, the United States would be exporting (high end) goods that other countries don't produce.