Canada's merchandise trade balance improved in May while the import-export situation in the United States hit its worst level since October 2008, according to figures released Tuesday.

In May, Canada saw its trade deficit shrink by five per cent, thanks to the fact that exports grew slightly faster than the amount of foreign goods purchased by Canadians, according to Statistics Canada.

By contrast, the U.S. Commerce Department said the U.S. May trade deficit — what its citizens bought from foreign countries compared to the amount of products and services other countries shipped out of the United States — rose to its highest level in two-and-a-half years.

And the details of the U.S. results were even more bothersome, analysts said.

"Imports jumped 2.6 per cent, completely erasing the prior month's decline, while exports (worryingly) fell 0.5 per cent," said Jennifer Lee, a senior economist with BMO Economics in a morning note.

Canadian gain

Canada's goods trade deficit fell to $814 million in May, down from a shortfall of $857 million in April.

Canada experienced a gain of 1.2 per cent in exports sold abroad, reaching $36.9 billion in the fifth month of the year. The volume of what Canadians sold overseas rose even higher, up 1.5 per cent. That was because the prices for Canadian products actually fell in May, down 0.3 per cent.

Exports of industrial goods rose four per cent in May, hitting $9.5 billion while foreign sales of machinery and equipment were up as well, gaining 4.8 per cent in the month, rising to $6.3 billion in sales.

Conversely, energy sales slumped, down 3.6 per cent in May, but still up almost 20 per cent when you compare the level in May 2011 to May 2010.

U.S. pain

The May U.S. goods and services balance went in the opposite direction from Canada.

That country's trade deficit grew to $50.2 billion US compared to a shortfall of $43.6 billion US in April.

Generally, countries want to post trade surpluses, essentially selling more products and services abroad than they buy from foreigners. But economists point out that a trade deficit is not necessarily a problem if the country's exports are growing at a decent clip.

In May, however, the United States saw its exports fall, down half-a-per cent, the first such decline since February. In this case, slumping sales can be a sign of waning foreign demand for goods and services, a possible threat to a U.S. recovery.

Worse still, the American dollar has weakened in recent months, especially against the euro, a situation which generally would boost exports but not in evidence in May's figures.

One partial explanation for the worsening trade situation in the United States is a recovery in Japanese auto parts production in the month.

In April, imports of car parts from Japan slide more than 20 per cent because of production stoppages due to the recent major earthquake in the Pacific country. In May, auto parts imports rose, up almost five per cent in the month.

Perhaps more troubling from an overall economy's perspective, however, is a drop in consumer imports, excluding cars and trucks, which fell two per cent in May. When an economy is in recovery mode, a country's consumers often boost their purchases faster than domestic production, resulting in more imports.

In this case, slipping consumer purchases of foreign products could be a possible warning sign of slowing demand among Americans, analysts noted.