U.S. Trade Deficit Dip Not Likely to Trend Given Strong Dollar, Global Economic Slowdown

In the wake of the plunge in U.S. Treasury yields and talk of a recession in the future, there was good news on Wednesday. The Commerce Department reported the U.S. trade deficit pulled back in January from the widest level in ten years as imports from China plummeted.

Before you get too excited, the news doesn’t necessarily mean that President Trump’s year-long tariffs against the world’s second largest economy are working, but it does suggest that American companies may have rushed shipments to China in the prior month to beat an expected tariff boost that was supposed to kick in on January 1 before President Trump put them on hold to facilitate a trade deal.

U.S. Trade Deficit Narrows

On Wednesday, the government reported the deficit in goods and services narrowed to $51.1 billion, smaller than the median estimate of economists. Imports fell 2.6 percent while exports rose 0.9 percent. Additionally, the merchandise-trade gap with China, shrank to $33.2 billion as imports from the nation dropped 12.3 percent.

In addition to the new tariffs that were supposed to kick in on January 1, analysts said that the Lunar New Year holiday in China may have contributed to the drop in the figure.

Analysts are also questioning whether the deficit can continue to trend lower because the slowing global economy and the stronger dollar may have impacted demand for U.S. goods. Basically, American demand is expected to support shipments of imported goods, but a stronger dollar and a global economic slowdown may weigh on exports.

The Details

Bloomberg reported that the January trade data compared with a $59.9 billion deficit in December, a 10-year high. Additionally, the median estimate of economists surveyed by the news service called for a deficit of $57 billion.

In 2018, the trade deficit widened to $621 billion, also a 10-year high. Last year, domestic demand for imports was driven by cuts, while a strong dollar weighed on exports.

The report showed that the deficit in goods narrowed to $73.3 billion, while the surplus in services edged up to $22.1 billion.

Overall exports rose to $207.3 billion, supported by gains in cars, trucks, jewelry and consumer goods. Imports hit a seven-month low of $258.5 billion. They were hurt by weak sales of computer accessories, semiconductors and oil.

There was good news from the agricultural side, soybean exports more than quadrupled to $1.2 billion. This may have been influenced by China’s “good faith” purchase after the country pledged to buy more of the crop. However, this news was offset by a drop in overall exports to China. They fell to $7.1 billion, the lowest since 2000 on an adjusted basis.

Conclusion

On the surface, the news looks good because it appears to be supportive for the Trump administration’s plan to level the playing field with China and other global partners. Additionally, given the results, the Atlanta Federal Reserve raised its estimate of first-quarter GDP to 1.5 percent. The estimate had been as low as 0.2 percent on March 12. However, there are some skeptics.

“The sharp fall in the trade deficit in January was primarily due to a larger than expected fall in imports, which is hardly a positive sign for the economy,” Michael Pearce, senior U.S. economist at Capital Economics, said in a note. “Nonetheless, with imports now likely to have been flat, or fallen slightly, in the first quarter overall, net trade is likely to be a positive for economic growth in the first quarter.”