U.S. trade deficit
As the U.S. consumers keep spending and living high on loans and credit cards, the country is becoming increasingly dependent on imports. Some argue that a U.S. trade deficit is bad for the country, with the overall U.S. trade deficit widened to about $1 trillion annually as Americans bought large volumes of foreign products. This is certainly not a new phenomenon as the U.S. last had a trade surplus in 1975. The U.S. Census Bureau’s foreign trade data show that over the past four decades, the trade deficit in goods with China has gradually increased from $6 billion in 1985 to about $400 billion today.
The U.S. international trade deficit widened $5.8 billion to $78.8 billion in July. The larger deficit was presaged by advance data released last week that showed goods imports jumping over the month, while goods exports were essentially flat. This data confirm that import demand remains firm despite the dollar’s slide over the past few months; total imports were up 8.4% over the past year in July. Exports have strengthened as well, although not to the same degree as imports. Total exports were up 5.0% on a year-ago basis in July. The comparative strength in imports has led the trade balance to decline to its lowest level since the summer of 2022.
Goods exports were weak in July primarily due to a substantial decline in automotive vehicles and parts (-11.2%) outflows. The choppiness in auto trade reflects the ongoing normalization in a sector that has faced several acute supply and labor challenges since the pandemic. Consumer goods exports (-3.6%) slipped as well, but the decline was offset by a solid increase in capital goods exports, which has been underpinned by strength in semiconductors and civilian aircraft.
On the import side, merchandise inflows rose 2.3% in July with support from capital goods and industrial supplies. Most of the uptick in supplies was driven by metals, as non-monetary gold and finished metal shapes each contributed nearly two percentage points to the category’s overall 5.1% monthly rise. This is a notable outturn given that crude oil inflows typically dominate this category. A jump in computer accessories, which has been in high demand domestically, accounted for much of the gain in capital goods imports. Consumer goods rose a more modest 0.9%.
While modest, consumer imports were more broad-based in July than in recent months. That is, one category, that has little to do with underlying demand conditions, has accounted for all the growth in consumer imports so far this year, medical, dental and pharmaceutical preparations. Consider that while overall consumer goods imports are up $10.2 billion on a year-to-date basis so far this year, pharmaceutical preparations have risen a whopping $19.4 billion over the period. In other words, without the gain in pharmaceutical prep, consumer goods imports would be down this year.
Despite this relatively concentrated strength in import growth, a resilient consumer has been a powerful source of growth for the U.S. economy in recent years. The resilient consumer is basically code words for Americans shopping too much and more than they can afford. For the second quarter, consumer spending accounted for 65% of real GDP growth and July data suggest spending remained strong in the early innings of the third quarter. A normalization in consumer goods imports after the pandemic-related boost, better inventory management and sustained services spending help explain the divergence between consumer imports and domestic spend.
Yet the surge in underlying imports still suggests net exports will weigh on growth. Real goods imports rose nearly 2% in July while real exports slid over 1%. July’s data thus position net exports to again be a considerable drag on third quarter growth, and we now expect trade to subtract more than half-a-percentage-point off of headline real GDP growth in the third quarter. As there are other factors impacting the economy negatively, like higher unemployment and a slow Fed rate cut, the export industry will have a tough time until the dollar weakens significantly. This can take awhile as the Fed rate is still too high and the dollar is still a safe haven currency in a turbulent world.
If the trade deficit is primarily the reflection of deeper choices about how we use our money, then changing it requires making different choices. After all, the U.S. is built on consumerism, borrowed money and credit cards. To shrink the trade deficit, Americans would either consume less and save more or invest less. In the short term, that would mean accepting a different way of living because Americans would have fewer goods and services available.
In the longer term, whether Americans continue adjust to a life with less consumption would depend on what happens to investment. Investment today means we can produce more tomorrow. So, if we shrink the trade deficit by saving more and reducing the federal government’s budget deficit, then Americans can maintain investment and return to having higher incomes in the long run. But if Americans shrink the trade deficit by reducing investment, then the standard of living would fall further. Trade deficit is not an economic scorecard between nations. Instead, it is the result of choices we make as a nation about saving, spending, and investing. The only way to change it is to make different choices. It is difficult to imagine a change in American behavior and shopping desires so a safe prediction would be a continued high trade deficit.