US: International Trade

Fri Oct 05 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous Revised
Trade Balance Level $-53.7B $-54.0B to $-47.6B $-53.2B $-50.1B $-50.0B

Whether tariff effects are in play is uncertain. What is certain, at least for third-quarter GDP, is that the deficit in net exports is deepening at a substantial rate. The nation's trade deficit widened to $53.2 billion in August with July at $50.0 billion. This compares with a monthly average of $44.6 billion in the second quarter which spells big trouble for net exports in the third-quarter GDP report.

Exports are in reverse, falling 0.8 percent in August after a 1.0 percent drop in July. The export of services, which is the nation's strength and which seems to be dodging any trade-war fire, rose 0.3 percent to $70.5 billion in August. Exports of goods, in contrast, fell 1.4 percent to $138.9 billion following July's 1.6 percent plunge. The weakness in goods is centered in agricultural products, down $1.2 billion in the month to $12.0 billion with industrial supplies also noticeably weak, down $2.4 billion to $44.1 billion.

On the import side of the report, they rose 0.6 percent to deepen the deficit with gains centered in vehicles which rose $1.0 billion to $31.7 billion. Imported consumer goods, which are the nation's big trouble spot, rose $0.9 billion to $53.5 billion.

Country data show a deepening imbalance with China, at $38.6 billion vs July's $36.8 billion with the deficit with Mexico widening to $8.7 billion vs $5.5 billion in July. The deficit with Canada narrowed noticeably to $2.7 billion as did the deficit with the EU at $15.7 billion. The deficit with Japan deepened sharply in the month to $6.0 billion from August's $5.5 billion.

Tariffs are an unfolding controversy which cloud the results for August. Not clouded at all, however, is the effect of net exports on third-quarter GDP which is substantially negative. But third-quarter GDP looks to get a favorable lift from welcome inventory growth and, perhaps, from consumer spending. Still the cross-border diagnosis in the third quarter, with one month still to go, looks to be clearly unfavorable.

Market Consensus Before Announcement
After narrowing sharply in the second quarter, the trade deficit opened the third quarter with a steep deepening to $50.1 billion in July and further deepening is expected for August. Based on advance data for the goods portion of the trade report, forecasters see the August international trade deficit at a consensus $53.7 billion. This would compare very unfavorably with a monthly average of $44.8 billion in the second quarter. The results for August will mark a key entry into 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 48 countries and 7 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.