US: International Trade

Thu Apr 05 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous Revised
Trade Balance Level $-56.7B $-57.6B to $-55.0B $-57.6B $-56.6B $-56.7B

The nation's trade deficit keeps deepening, to $57.6 billion in February for the fourth straight showing over $50 billion in a curve that continues to accelerate. The goods gap widened 0.4 percent in the month to $77.0 billion while, in a more significant effect, the services surplus narrowed 3.1 percent to $19.4 billion.

The goods gap reflects a 1.6 percent rise in imports to $214.2 billion that offsets and masks a solid 2.3 percent rise in exports to $137.2 billion. Leading the import side is a jump in food and industrials supplies and especially capital goods, the latter a positive indication for domestic business investment. Leading the export side are industrial supplies as well as a rare jump for vehicles and also a solid gain for capital goods which points to international business investment. For services, exports did in fact extend their steady climb to an impressive $67.3 billion in the month though imports also posted a rise, up 2.3 percent to $47.8 billion (further details on services are not available).

Country data show February's net gap with China at $29.3 billion followed in the distance by the European Union at $12.1 billion and Mexico at $6.1 billion. The gap with Japan was $5.5 billion in the month and with Canada, at $0.4 billion.

Though there are clear positives, namely the strength of cross-border demand, it's the increasing drag from net exports on GDP that is really the news of this report, one that is certain to get ever-increasing attention given all the questions over rising trade friction centered between the U.S. and China.

Market Consensus Before Announcement
The international trade deficit for goods and services is expected to widen slightly in February to $56.7 billion which would be in line with a deepening in the month's goods deficit (already reported). Exports may be solid in the February report but look to be offset by a further rise for imports.

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.