The U.S. trade deficit unexpectedly narrowed by $2.6 bln in January to $37.3 bln. The consensus estimate called for it to increase to $41.0 bln.
Exports in January fell by $0.5 bln to $142.7 bln while imports declined by $3.1 bln to $180.0 bln.
Key Factors
The increasing value of the dollar did not seem to play a major role in the export decline. Civilian aircraft, which are typically hedged against changes in foreign exchange, led the export decline as shipments fell by $0.474 bln.
Petroleum imports declined by $0.878 bln in January. This was surprising considering the personal consumption data showed gasoline consumption surging by 7.0% during the month.
While the problems with Toyota did not occur until the end of the month, nonseasonally adjusted passenger car imports from Japan fell by $0.513 bln.
Big Picture
The trade deficit can be thought of as a Catch-22 situation for the US economy. A drop in the deficit has resulted from import demand declining at a faster rate than the decline in export demand. The result was an increase in GDP growth without any actual increase in output. The recent rise in the deficit was the result of both exports and imports growing, but with imports outpacing exports. We are now experiencing an increase in output, but GDP is negatively affected. The trade-off of more production for negative GDP growth is better than the reverse and we'll take the increasing deficit as a signal of a stronger economy.
The trade report is most widely watched for trends in the overall trade
balance. But trends in both exports and imports of goods and services bear
watching as well. The export data in particular are important to watch for
indications that a strengthening competitive position at home and/or
strengthening economies overseas are boosting U.S. growth. Imports provide an
indication of domestic demand, but given the severe lag of this report relative
to other consumption indicators, it is not particularly valuable for this
purpose.
The volatility in the monthly trade balance can play an important role in
GDP forecasts. Net exports are a relatively volatile component of GDP, and the
trade report provides the only early clues to the net export performance each
quarter.
