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Fundamental Analysis

Export Strength Leads Trade Deficit to Narrow to the Smallest Level Since US Election


The U.S. international trade deficit narrowed in May by $1.1 billion (bn) to $46.5 bn from the April figure of $47.6 bn (revisions to April were negligible). Consensus expectation was for the trade balance to narrow a bit more to -$46.2 billion.

Goods exports rose 0.2% m/m in May, driven higher by a surge in consumer goods (+5.6%) and automotive vehicles and parts (+4.9%). Although there were large declines recorded in foods, feed and beverage exports (-6%), and smaller declines in capital goods and industrial supplies, they were not material enough to offset strong gains in consumer and automotive exports. Exports of services rose 1.0% m/m in the month, the fastest pace yet for 2017.

Imports declined 0.1%m/m in May, driven down by declines in consumer goods (-2.9%) and automotive vehicles and parts (-2.4%). These declines were largely offset by gains in capital goods (+2.4%) and industrial supplies (+0.2%).

Adjusting for price changes, merchandise exports rose 1.0% m/m in May, ending the streak of consecutive monthly declines at three. Import volumes rose 0.1% m/m, similar in magnitude but the opposite direction of the nominal change.

As the headline figure suggests, the U.S. trade balance with its major trading partners narrowed on net in May. The trade deficit with the European Union widened a touch in May, as did deficits with China and Mexico. However, given the monthly volatility of trade data, more telling is the year-to-date balance relative to last year. This metric suggests that trade deficits with NAFTA members Canada and Mexico have widened considerably thus far in 2017; the trade deficit with Canada has widened by $7.7 bn, and by $3.8 bn with Mexico. Similarly the trade deficit with Europe widened by $2.9 bn, and with China by $6.9 bn. Lastly, the trade deficit with OPEC nations widened by $15.3 bn YTD compared with last year, consistent with much stronger oil imports.

Key Implications

The gain in export volumes was a welcome surprise after months of decline, but net-trade is unlikely to be a major source of growth for the U.S. economy. The weaker trade-weighted dollar and improved foreign demand environment should act to support U.S. exporters for the remainder of this year, but strong domestic demand should boost imports further, resulting in net trade exerting a small drag on 2017 economic activity.

Looking ahead, the uncertain global environment could still exert a material headwind to U.S. exporters. From domestic and global policy uncertainty to geopolitical events, risks to net trade will remain skewed toward the downside for some time.

Author: TD Bank Financial Group Website:
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
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