US: International Trade

Fri Jan 05 07:30:00 CST 2018

Consensus Consensus Range Actual Previous Revised
Trade Balance Level $-50.0B $-50.5B to $-46.0B $-50.5B $-48.7B $-48.9B

Net exports look to be holding back fourth-quarter GDP following a second month of deep deficit, at $50.5 billion in November following an upward revised $48.9 billion in October. The monthly average two months into the fourth quarter is $49.7 billion which compares very unfavorably with the third-quarter monthly average of $45.1 billion.

Aside from GDP where imports are a negative, there are substantial signs of strength in today's report. Exports jumped 2.3 percent in the month to $200.2 billion led by a 3.4 percent expansion in goods, to $134.6 billion, though service exports, at $65.7 billion, could manage only a 0.1 percent gain. Exports of capital goods and especially aircraft were very strong with solid gains also posted for vehicles and even consumer goods.

Imports, at $250.7 billion, jumped 2.5 percent in the month and offer definitive evidence that domestic demand is very strong. Details on the import side show what is in fact a sizable and welcome gain in capital goods which points to new business investment in what will help the nation's productivity. Imports of consumer goods, however, also rose and very sharply, up $2.4 billion to $52.4 billion. Oil imports rose nearly $1 billion in the month to $15.7 billion reflecting an increase in both volume and price.

Country data show a small rise in the deficit with China, now at $35.4 billion, and a sharp rise in the deficit with the EU to $14.7 billion. Monthly deficits shrunk with Mexico at $6.0 billion, Japan at $5.8 billion, and Canada at $1.0 billion.

The fourth quarter looks to have been very healthy though the rise in imports, even though it reflects increased domestic demand, will nevertheless hold down fourth-quarter GDP.

Market Consensus Before Announcement
The international trade deficit is expected to widen in November, to $50.0 billion from October's already steep deficit of $48.7 billion. A comparison with the third-quarter monthly average of $45.1 billion is not favorable for fourth-quarter GDP. Advance data on the goods portion of this report showed widening in November as a rise in imports offset a rise in exports.

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.