|Trade Balance Level||$-42.0B||$-45.0B to $-39.3B||$-41.9B||$-43.8B||$-45.2B|
The nation's trade gap narrowed to a nearly as expected $41.9 billion in July following an upward revised gap of $45.2 billion in June (initially $43.8 billion). The improvement reflects a monthly rise of 0.4 percent in exports, which were led by autos, and a 1.1 percent contraction in imports that reflected a decline in pharmaceutical preparations and cell phones which helped offset a monthly rise in imports of oil where prices were higher in July.
Aside from autos, exports of industrial supplies, specifically nonmonetary gold, were strong in July while exports of capital goods also expanded. This helped offset a monthly decline in exports of civilian aircraft and consumer goods. Turning again to imports, other details include a rise in capital goods in what is the latest sign of life for business investment.
By nation, the gap with China widened slightly, to an unadjusted $31.6 billion in the month, while the gap with the EU widened more substantially to $15.2 billion, again unadjusted which makes month-to-month conclusions difficult. Gaps with Mexico and Canada both narrowed.
This report is another positive start to the quarter and will lift early third-quarter GDP estimates. But these will be cautious estimates as recent market turbulence pushes back conclusions and will make August's trade data especially revealing.
Market Consensus Before Announcement
International trade is expected to show a narrowing in the nation's trade gap to $42.0 billion from June's $43.8 billion. Advance trade data showed a rise for exports and a fall in imports for the month, a solid mix to open third-quarter GDP.
International trade is composed of merchandise (tangible goods) and services. It is available nationally by export, import and trade balance. Merchandise trade is available by export, import and trade balance for six principal end-use commodity categories and for more than one hundred principal Standard International Trade Classification (SITC) system commodity groupings. Data are also available for 36 countries and geographic regions. Detailed information is reported on oil and motor vehicle imports. Services trade is available by export, import and trade balance for seven principal end-use categories.
Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect the value of the dollar in the foreign exchange market.
Imports indicate demand for foreign goods and services here in the U.S. Exports show the demand for U.S. goods in countries overseas. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States, since this trade imbalance creates greater demand for foreign currencies. The bond market is also sensitive to the risk of importing inflation. This report gives a breakdown of U.S. trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.
The international trade balance on goods and services is the major indicator for foreign trade. While the trade balance (deficit) is small relative to the size of the economy (although it has increased over the years), changes in the trade balance can be quite substantial relative to changes in economic output from one quarter to the next. Measured separately, inflation-adjusted imports and exports are important components of aggregate economic activity, representing approximately 17 and 12 percent of real GDP, respectively.
Market reaction to this report is complex. Typically, the smaller the trade deficit, the more bullish for the dollar. Also, stronger exports are bullish for corporate earnings and the stock market.
Both the level and changes in the level of international trade indicate relevant information about the trends in foreign trade. Like most economic indicators, the trade balance is subject to substantial monthly variability, especially when oil prices change. It is more appropriate to follow either three-month or 12-month moving averages of the monthly levels.
It is also useful to examine the trend growth rates for exports and imports separately because they can deviate significantly. Trends in export activity reflect both the competitive position of American industry and the strength of domestic and foreign economic activity. U.S. exports will grow when: 1) U.S. product prices are lower than foreign product prices; 2) the value of the dollar is relatively weaker than that of foreign currencies; 3) foreign economies are growing rapidly.
Imports will increase when: 1) foreign product prices are lower than prices of domestically-produced goods; 2) the value of the dollar is stronger than that of other currencies; 3) domestic demand for goods and services is robust.
The international trade report does show bilateral trade balances with our major trading partners. Since the value of the dollar versus various foreign currencies does not always move in tandem, we can see a narrower or wider trade deficit with different countries. In the 1980s and 1990s, the U.S. trade deficit with Japan often caused political problems. In the 2000s, the trade deficit with Japan is now smaller, but the U.S. trade deficit with China is growing rapidly. While American consumers benefit from weak imports, American workers often lose their jobs as these goods are no longer produced in the United States. Ideally, the United States would be exporting (high end) goods that other countries don't produce.