US: International Trade

Thu Oct 05 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous Revised
Trade Balance Level $-42.5B $-45.2B to $-41.4B $-42.4B $-43.7B $-43.6B

August trade data are positive for third-quarter GDP, at a deficit of $42.4 billion which is right at expectations and includes gains for exports and declines for imports. Exports rose 0.4 percent to $195.3 billion and include a 0.4 percent rise for goods, to $129.2 billion, and a 0.1 decline for imports to $237.7 billion. The goods deficit, as indicated in last week's advance report, improved 1.3 percent to $64.4 billion while the services surplus, fresh data in today's report, widened 1.4 percent to $22.0 billion.

The export side shows gains for consumer goods and capital goods while the import side shows declines for industrial supplies and capital goods. Petroleum trade, reflecting a nearly $1 price rise to $44.11 per imported barrel as well as a rise in import volume, was a negative in the month with the deficit widening to $4.9 billion from July's $3.0 billion. Country data show monthly widening with Mexico, to a cross-border deficit of $6.2 billion, and China to $34.9 billion, and narrowing with the EU to $12.4 billion.

The effect of Hurricane Harvey's late August landfall on Texas could not be quantified by the Bureau of Economic Analysis, though Hurricane Irma's hit on Florida in the next trade report for September, given its impact along the Southeast seaboard, is still a wild card for third-quarter net exports.

Market Consensus Before Announcement
The international trade deficit held steady in July and forecasters, in what be a plus for third-quarter GDP, are calling for a sharp narrowing in August to $42.5 vs July's $43.7. This would be in line with advance data on the goods part of the report which narrowed in August, to $62.9 billion from $63.9 billion. Note that hurricane effects are in play as Irma may have shut in imports and kept out exports during the month.

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.