Trade deficit declines.  The Bureau of Economic Analysis announced that the trade deficit fell in August to $30.7 billion (a $1.2 billion decrease from July) due to a decline in imported goods as well as a modest increase in exported services.   In August 2008, the trade deficit was almost twice as large.  August imports were down almost $1 billion from July to August while exports were up $0.2 billion.  The decline in imported goods from July to August reflects a large decrease in imports of industrial supplies and materials (down $1 billion) and consumer goods (down $0.7 billion).  Imports of crude oil also fell in August (down 6.6 percent) despite an increase in crude oil prices in August of more than 10 percent in real terms.  Notably, imports of automotive vehicles, parts, and engines increased by $1.2 billion, as purchases of new cars increased in response to the Car Allowance Rebate System (CARS or “cash for clunkers”), which expired on August 24.  While the trade balance narrowed recently, the August decline in imports is small relative to large increases in imports in June and July (See Chart) and does not appear to reflect a recent distaste for imported goods by US consumers. 

Retail sales weaken due to a decline in auto sales.  The Census Bureau announced that retail and food services sales declined in September by 1.5 percent relative to August. Sales of motor vehicles declined 11.8 percent from August to September after increasing 8.8 percent from July to August.  Excluding motor vehicles and parts, retail sales increased by 0.5 percent from August to September.  The decline in automotive sales was an expected response to CARS as consumers moved up purchases of automobiles.

 September’s ISM Non-Manufacturing Index (NMI) shows signs of economic expansion.  The Institute for Supply Management’s (ISM) NMI ticked above 50 percent in August, the first time since September 2008 that the index has been at 50 or above.  Values over 50 percent reflect economic expansion.  Five industries reported growth in September: utilities, health care and social assistance, retail trade, construction, and wholesale trade.  ISM’s manufacturing index, ISM PMI, has shown signs that the manufacturing sector has been expanding since August.

Four-week moving average of initial jobless claims decline for the fifth straight week.  The four-week moving average of initial jobless claims declined by 9,000 in the week of October 3, 2009 to 539,750.  The four-week moving average of initial jobless claims reached its peak in the week of April 4, 2009 and has since declined by almost 20 percent from that peak.  A decline of this magnitude is consistent with economists’ expectations of economic expansion in the third quarter of 2009.  However, unemployment rates will continue to rise for some time even after employers begin rehiring due to the backlog of job losses.  In a recent speech before the National Association of Business Economics Donald Kohn, Vice Chairman of the Federal Reserve, cited tight credit conditions, the high rate of excess capacity, and an overhang of vacant housing as explanations behind the Federal Reserve’s belief that the recovery will be modest.