Reuters

(Reuters)

Fed: Strong Dollar, Low Oil Prices Weigh on Economy

The Fed Reuters

The U.S. trade deficit narrowed in April on a drop in imports, which surged in March following the end of a West Coast ports labor dispute, while companies picked up their hiring in May after a pullback the previous month.

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The data supported the notion the U.S. economy has recovered somewhat from a first-quarter contraction and bolstered expectations the Federal Reserve may consider raising interest rates later this year.

Not all the news on Wednesday was as encouraging.

Two private reports signaled slower growth in the U.S. services sector, which has propped up the economy as it faced drags from a strong dollar, a recent rise in oil costs and sluggish demand abroad.

"This is consistent with modest growth. It's enough for the Fed to consider tightening. September is very much on the table," said Christopher Low, chief economist at FTN Financial in New York.

U.S. central bank, which will hold a policy meeting June 16-17, concurred with that view in its latest Beige Book released on Wednesday.

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This collection of anecdotes on the economy from early April to late May showed U.S. growth will continue at a "modest" to "moderate" pace, despite weakness in metal and energy industries and a strong dollar crimping exports.

U.S. stock indexes gained 0.4-0.5 percent after the data. The dollar and prices of U.S. Treasuries fell, which traders said was due more to the selling of German Bunds and gains in the euro after the European Central Bank upgraded its inflation outlook. [.N] [US/] [FRX/]

The U.S. Commerce Department on Wednesday said the trade gap narrowed to $40.9 billion from March's revised deficit of $50.6 billion. The 19.2 percent drop in the April trade deficit was the largest decrease since early 2009, and the deficit was about $3 billion less than forecast.

Imports fell 3.3 percent to $230.8 billion as West Coast

ports, a key gateway for goods to and from Asia, cleared a

backlog created by a labor dispute that was settled earlier this year.

Exports increased 1.0 percent to $189.9 billion in April with foreign sales of U.S. services edging up to a record high of $60.9 billion. In recent months, the strength of the dollar has made U.S. goods and services more expensive abroad.

The April petroleum deficit stood at $6.8 billion, the

lowest since March 2002.

The latest trade data led Morgan Stanley to raise its forecast of U.S. economic growth in the second quarter to 2.7 percent from 2.2 percent.

EYES ON PAYROLLS

Meanwhile, private employers added 201,000 jobs in May, the most since January, payrolls processor ADP said on Wednesday.

That was in line with analyst forecasts and higher than a revised 165,000 jobs in April, which were the fewest since January 2014.

The ADP data came ahead of the U.S. Labor Department's more comprehensive non-farm payrolls report on Friday, which includes both public and private-sector employment.

Economists polled by Reuters are looking for total U.S. employment to have grown by 225,000 jobs in May, similar to April's 223,000 increase. The unemployment rate is seen holding at a near seven-year low of 5.4 percent.

Flying in the face of the better trade and jobs outlook, other data showed services industries booked fewer new orders last month.

Financial firm Markit said its final May reading of its Purchasing Managers Index for the services industry slipped to 56.2, its lowest since January.

The Institute for Supply Management's own services sector gauge fell to 55.7 last month, its weakest since April 2014.

(By Richard Leong; Additional reporting by Elvina Nawaguna in Washington; Editing by Meredith Mazzilli, Paul Simao and Chizu Nomiyama)

 

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