INDICATOR: April Trade Deficit

KEY DATA: Deficit: $50.1 billion ($2.5 billion narrower)

IN A NUTSHELL: “While imports and exports fell, they are still near record levels and that says economic conditions have not fallen apart.”

WHAT IT MEANS: The trade deficit narrowed in April and that is the good news. The bad news was that exports and imports were down, a trend that is not nice to see.

So, should we be worried? No. First, recognize that the April levels for both foreign sales and U.S. demand for overseas products were the second highest on record. Given that there were huge increases in March, the April declines were small enough that we had two steps forward but only one step backward.

The details don’t give a clear picture or weakness. On the export side, our sales of food, vehicles and consumer products rose. However, the declines in capital goods and industrial supplies were widespread enough to raise concerns that the problems around the world are starting to eat into our sales. Indeed, our exports to Europe cratered.

Civilian aircraft and engines sales were down fairly sharply and that may not be something to be overly concerned about as Boeing has enough orders to keep them busy for quite some time. On the import side, there were sharp drops in petroleum related products, but that came after an unusually large increase in March. I don’t read a whole lot into that. Why vehicle imports would come off after sales had been rising is another question.

But the real oddities were a nearly $1 billion drop in computer purchases, a 15 percent fall off and a $1.4 billion decline in pharmaceutical preparations. If you know why please tell me. Adjusting for inflation, the balance fell from March’s level but is up compared to the first quarter average. That points to trade taking away from growth this quarter.

MARKETS AND FED POLICY IMPLICATIONS: You can say that declining exports and imports is a sign of growing weakness. Or, you can note that the March increases were way larger than anyone expected so the moderate fall off in April indicates that conditions remain strong.

For me, the glass is half full but I am worried about Europe. A one month drop of 11 percent is an eye-opener. Still, if we see a 10 percent decline in our sales to Europe (we are actually up 3.5 percent so far this year), the impact on growth would be relatively small nonetheless. So let’s fret about Europe but unless there is a meltdown, the economic implications for the U.S. are not that significant.

Unfortunately, investors like to watch headlines and this report cannot be helpful. Indeed, the focus will likely be on the declines in exports and imports not the fact that they are still incredibly high. Oh, well, that is the way of the news.

Europe is a real concern, don’t get me wrong, but it is the financial concerns that hold sway. As long as the continent can skate by without a major economic and financial collapse, the U.S. economy will not be hurt greatly.