The U.S. international trade deficit narrowed by $4.6bn, or more than $1bn more than expected, declining to $43.6bn from January’s downwardly revised $48.2bn.
Goods exports increased by 0.2% m/m in February, with a sharp uptick in consumer goods (+4.0%) and automotive (+1.4%) nearly offset by a decline in food & beverage (-6.0%) and capital goods (-1.4%). Services exports were largely unchanged in February from the month prior.
Imports declined -1.8% m/m in February, on lower automotive (-8.3%) and consumer goods (-5.9%) imports. Imports of other categories were more robust. Petroleum imports were up as the effect of higher prices was offset by lower import volumes.
After adjusting for price fluctuations, the rise in merchandise exports was far more apparent, with real goods exports up a stronger 0.3% on the month. The decline in goods imports was also more accentuated in volume terms, down by 2.6% in February.
Most of the goods improvement was related to the trade deficit narrowing vis-à-vis Europe (-$12.0bn vs. -$13.4bn in January). On the other hand, the trade deficit with China (-$31.7.0bn vs. -$30.1bn in January) continued to expand. The goods trade deficit with North America also widened slightly, as the wider gap with Mexico (-$6.2 vs. -$5.5bn in January) was compounded by a slight widening of the Canadian one (-$2.4bn vs. -$1.8bn in January).
Key Implications
This was a relatively decent report. Exports saw a small uptick, following outsized gains in the previous two months, while imports declined after a four month expansion. Still, despite the narrowing this month from an elevated January gap, the U.S. trade deficit remains sizeable.
Despite vows to bring it down, it’s unlikely that the new administration’s policies will be able to alter the course of the trade balance, which is buttressed by the high dollar and comparatively strong U.S. demand vis-à-vis the rest of the world. Moreover, any policies that serve to disrupt global trade may result in unintended negative consequences for the American economy.
Neither the high dollar nor subdued global growth are likely to go away anytime soon, but the backdrop has become somewhat more supportive recently, with global growth strengthening and the dollar paring back gains in light of the very gradual pace of rate increases by the Fed.
After subtracting 1.8 percentage points in the last quarter of 2016, net-trade looks to be more even keeled at the start of 2017. Ultimately, we expect only modest drag on economic activity. Still, in light of the expected drawdown in inventory investment, the U.S. economy appears to have expanded by only 1% in the first quarter of the year.
