US: International Trade

Thu May 04 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous Revised
Trade Balance Level $-44.5B $-47.8B to $-41.4B $-43.7B $-43.6B $-43.8B

A decline in imports held down March's international trade gap to $43.7 billion which is moderately under Econoday's consensus for $44.5 billion. But the breakdown doesn't point to cross-border strength as exports fell 0.9 percent to $191.0 billion in the month against a 0.7 percent decline for imports at $234.7 billion.

The petroleum gap widened sharply in the month to a nearly 2-year high of $7.9 billion and reflects higher prices for imports and a decline in exports. Exports showing the most weakness are industrial supplies, autos, and consumer goods. Foods rose slightly in March as did the key category of capital goods which otherwise has been flat.

On the import side most components are lower especially capital goods in what, along with capital goods shipments and nonresidential construction spending, is another contrast with the first-quarter GDP surge in nonresidential investment. Contrasting with the weakness in imports is a rise in imports of autos, up a sharp $1.2 billion in the month to $30.3 billion.

Country data are in line with trend: the nation's trade gap with China totaled $24.6 billion in the month followed by the EU at $11.2 billion with Japan at $7.2 billion and Mexico at $7.0 billion. Canada is next at a distant gap of $1.4 billion.

Breaking down the data between goods and services shows a small widening in the goods deficit to $65.5 billion offset in part by a modest looking but still constructive $0.4 billion dollar rise in the surplus on services. The overall decline in exports and imports is a concern, but today's report has several positives, not only the surplus on services but also the rise in capital goods exports. Today's report should give a modest and badly needed lift to revision estimates for first-quarter GDP.

Market Consensus Before Announcement
Forecasters see the international trade gap for goods and services widening to a consensus $44.5 billion in March from February's $43.6 billion. This would be in line with advance data on the goods deficit which rose $0.9 billion in March to $64.8 billion. Any surprises in the report could affect revision expectations for first-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.