The gap between imports and exports rose 16% – the largest percentage increase since February 1999 – to $32 billion in July from a revised $27.5 billion in June that was larger than previously reported, the Commerce Department said. After eliminating the influence of prices, which are the figures used to calculate gross domestic product (GDP), the trade gap widened to $38.8 billion from $35.8 billion.

Imports surged 4.7% to $159.6 billion, fueled by an increase in oil prices and strong demand for industrial materials. Crude oil prices rose to an average $62.48 a barrel from $59.17 in June. And imports of capital goods, which include cars and auto parts, jumped to $30.2 billion from $28.9 billion.

The government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” was the driving force behind the increase rising demand for capital goods. The program fueled a 1.8% increase in durable goods spending for the month, as sales of cars and light trucks rose to an annual pace of 11.2 million units in July – the most since September 2008. The gain in auto imports was probably even bigger in August when car sales surged to an annual rate of 14.1 million units.

The rise in imports far outpaced the increase in exports, which rose just 2.2% to $127.6 billion. That, too, was the result of greater demand for capital goods and industrial supplies – particularly in China.

Despite the worsening in the overall trade gap, the U.S. trade deficit with China narrowed to $20.42 billion in July from $25.03 billion in the same month last year.

“China is back,” Alcoa Inc. (NYSE: AA) Chief Executive Officer Klaus Kleinfeld said in an interview with Bloomberg News. “They had a lot of shovel-ready projects” planned for 2011 that starting now as part of the country’s stimulus effort.

Alcoa last week raised its 2009 forecast for global aluminum consumption because of demand unleashed by China’s $586 billion (4 trillion yuan) in stimulus package.

China’s economy grew by 7.9% in the second quarter, exceeding most analysts’ expectations, and lending credence to Beijing’s goal of 8% annual growth.

U.S. exports to the rest of the world are expected to rebound in the months ahead as the global economy inches toward recovery.

“The outlook for U.S. exports is becoming increasingly positive,” wrote Michael Feroli, an economist for JP Morgan Chase & Co. (NYSE: JPM). “Foreign economic growth has returned.”

U.S. trading partners grew at a 4% annual rate in the second quarter on a trade-weighted basis, Feroli noted.

Trade has been one of the few bright spots in the economy throughout the recession, contributing 1.6 percentage points to second-quarter GDP, helping to make up for declines in consumption and investment. Total U.S. GDP contracted 1% last quarter.

Source: U.S. Trade Deficit Widens, but Signals a Healthier Economy

McLean, Virginia-based Paice LLC has filed a complaint with the U.S. International Trade Commission (ITC) that claims the Toyota Camry infringes on its patents, Bloomberg News reported. An investigation into the claim could be completed within 15 months and result in a ban of some Toyota imports.

Paice, a developer of hybrid electric power train technology, in 2005 won a similar case against Toyota involving the Japanese carmaker’s Prius, Highlander and Lexus RX400h hybrid models. Paice claimed those vehicles used its drivetrain technologies, and a jury agreed, awarding the company $4.3 million in damages.

U.S. District Judge David Folsom rejected Paice’s request for a court order to halt the sales of Toyota vehicles in the United States, but he did force Toyota to pay royalties based on the cars’ wholesale prices.

Toyota appealed the claim but lost.

A similar ruling in this instance could be a huge blow to Toyota, whose hybrid vehicles were the main beneficiary of a shift in U.S. auto sales toward more fuel-efficient vehicles. The Camry was the best-selling vehicle in the nation last month, benefiting greatly from the U.S. Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers.”

New Toyotas accounted for 19% of the cars bought through the Clunkers program, and the company reported a year-over-year sales increase of 6.4%.

The company has sold more than 2 million hybrid vehicles worldwide since their launch in 1997. Those sales were led by the Prius model.

Source: Toyota Faces Possible Import Ban Over Paice’s Patent Suit

After the Commerce Department reported last week that retail sales fell 0.1% in July from June, and 8.3% year-over-year, retailers will stay in the limelight this week as several high-profile companies report second-quarter earnings. Target Corp. (NYSE: TGT), Limited Brands Inc. (NYSE: LTD), and Gap Stores (NYSE: GPS) are among the big-name retailers set to report.

Meanwhile, the Hewlett-Packard Co’s (NYSE: HPQ) report will provide a further glimpse into the world of technology, and The Home Depot Co.’s (NYSE: HD) results will confirm or counter claims that the recent housing rebound is for real.  On that note, the upcoming economic releases include July housing starts and existing home sales, while the wholesale inflation gauge may show that price pressures are not yet creeping into the producers’ side of the equation either.

Market Matters

While many more bearish analysts continue to proclaim “gloom and doom” and a drop back to the March-lows in equities, at least one noted naysayer may have shifted to the other team.  Hedge fund manager John Paulson purchased over $165 million shares of Bank of America Corp. (NYSE: BAC) to become the banking giant’s fourth largest shareholder.  Paulson was among the select few who predicted the subprime debacle, so his allocation into financials may be interpreted as a nice vote of confidence from an unexpected source.

Meanwhile, the U.S. Federal Reserve made a few bold moves to promote its case for recovery as well.  Following the policy meeting, Federal Reserve Chairman Ben S. Bernanke announced his intent to cease the program of buying up to $300 billion of Treasuries in October, as a major economic lifeline may have served its purpose well.  Additionally, banks have scaled back borrowing from the Fed’s emergency short-term lending facility, a sign that the frozen credit markets have thawed considerably.

Finally, the Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” was expanded, allowing car buyers to receive vouchers for future purchases as automakers report dwindling inventories.

Retailers took center stage in the earnings game as Wal-Mart Stores Inc. (NYSE: WMT) and Kohl’s Corp. (KSS) beat expectations, but still offered cautious projections for the months ahead (including the upcoming holiday season).  Macy’s Inc. (NYSE: M) posted a declining profit, but gave an optimistic outlook, as it benefits from cost-cutting measures.  Liz Claiborne Inc. (NYSE: LIZ), on the other hand, reported a wider loss and new streamlining plans and J.C. Penney Co. (NYSE: JCP) issued some pessimistic comments about the state of the consumer.

Seemingly recession-proof McDonalds Corp. (NYSE: MCD) announced strong July same-store sales as its coffee drinks competed effectively with the “big boys.”  On the transactional front, China continued its expansion into the global commodities markets as China National Petroleum Corp. and CNOOC Ltd. (NYSE ADR: CEO) have eyes on the Argentinean unit of Repsol YPF SA’s (NYSE: REP) to the tune of $17 billion. Microsoft Corp. (NYSE: MSFT) and Nokia Corp. (NYSE ADR: NOK) are teaming up to take on PDA leader Research in Motion Ltd. (Nasdaq: RIMM) in an alliance that brings the popular software together with a solid cellular player.

Fixed income investors got a boost from a successful 30-year bond auction, as $75 billion in new Treasury securities were well-received during the week.  The Treasury also announced a plan to issue more TIPS (inflation-adjusted bonds), a move aimed at alleviating concerns in China (the largest foreign holder of U.S. debt) that the government would allow a surge in inflation as it tries to finance the stimulus plans.

Higher inflation would increase the yields on TIPS and result in greater costs for the government.  Bond prices fell mid-week after the Fed announced its intent to end its Treasury purchase program, though the auction news was a welcome relief and a late-week flight-to-quality also ensued.

Investors focused on the lackluster consumer activity – illustrated by both earnings and economic releases – and worried that economic growth will be stunted as long as shoppers remain in hibernation.

Despite favorable reviews by the Fed, major equity indexes gave up slight ground during the week with the Standard & Poor’s 500 Index and Nasdaq Composite Index still flirting with 1,000 and 2,000 respectively.

Economically Speaking

No rest for the weary (especially when auditioning to keep a job).  Fed Chief Bernanke guided the latest Fed policy meeting that saw strong signs (and language) pointing to the recession nearing an end.  The Fed claimed the economy is “leveling out” and felt the Treasury purchase program could go away with no material detriment to the nation’s financial system.

The accompanying statement also indicated that the funds rate would remain just above zero for “an extended period” as many anticipate the recovery will be slow to take hold.  Noted economists apparently have Bernanke’s back as a recent survey revealed that most prefer he remain on as Fed Chair for another four-year term and President Barack Obama should reappoint him based on his strong performance in righting the ship during the worst economic downturn since the Great Depression

Treasury Secretary Timothy F. Geithner shared some tough talk as he objected to certain concerns that major financial companies have not learned their lessons and the recent profits are indications of pre-crisis-like risk-taking.

The economic data of the week offered mixed signals as retail sales surprisingly declined in July despite the popularity of the “clunker” program, though continuous claims for unemployment benefits fell to the lowest level since April.

The anticipated rebirth of the consumer may be on hold for now as the Reuters/U. of Michigan sentiment index fell again and individuals continue to worry about the state of the job market.

While the trade deficit increased in June, exports climbed for the second consecutive month and manufacturers experienced increased demand for products like semiconductors and telecommunication devises.  Likewise, industrial production rose in July as the “new and improved” domestic automakers attempt to get back on track.

On another favorable note, inflation remains a non-issue as the consumer price index (CPI) was unchanged from June and prices have fallen by 2.1% over the past year.  On the global stage, the French and German economies posted surprising growth in the second quarter and, though the broader Eurozone countries continue to contract, the recovery is already taking hold in that region of the world.

Weekly Economic Calendar

Source: Will This Week’s Earnings Reports Reflect a Recovery or a Relapse for the U.S. Economy?