Imports fell in August, but exports fell faster, resulting in a widening of the U.S. trade deficit. A gradual weakening in global trade will likely keep pace with weaker domestic demand in coming quarters.

Weakness in Goods Exports Captures Softening Global Economy

Earlier this week, the International Monetary Fund (IMF) dialed back its expectations for global economic growth for this year and 2013. To some extent, there are clues in today’s report that would seem to corroborate the story of a more tepid global growth environment.
Goods exports, for example, were led lower by key early cyclical input components. The largest drop in goods exports was in industrial supplies and materials, which fell $1.2 billion in August. There was also a decline in exports of automotive vehicles and parts. Foods, feeds and beverages also posted a big drop in August, which may be a reflection of a weaker harvest after this summer’s record heat and historic drought.

Signs of Softening Domestic Demand as Well

Based on the various components of imports that weakened in August, it appears that the pace of growth in consumer spending may be poised to slow and the weakness we have seen in business spending is not showing immediate signs of improvement. Consumer goods imports posted the largest overall decline of goods imports, falling $1.2 billion on the month, followed by a $0.8 billion decline in automotive vehicles and parts. This is disconcerting because auto sales and orders have been a key bright spot in recent months. In a separate release yesterday, the Fed’s Beige Book offered a mixed regional assessment on the outlook for auto sales. We will keep an eye on auto orders and sales. Perhaps the improvement in consumer sentiment may prevent a weakening in the final months of the year.
Capital goods imports also fell in August, suggesting no near-term offset to the recent slowing in orders and production. The $0.5 billion decline marks the third straight monthly decline for capital goods imports.

Trade May Weigh on Growth in Q3

In real terms, the trade deficit in goods widened by a revised $3.0 billion in July and another $1.4 billion in August. If the real trade deficit in September remains unchanged, then net exports would impart a mild drag on overall GDP growth in Q3. However, with growth in some of the country’s major trading partners looking increasingly fragile, further declines in exports volume over the next few months seem more likely than a sharp rebound. In that context, it seems likely that net exports could exert some headwind on real GDP growth in the third quarter.

At the outset of this report, we referenced the IMF’s recent downgrade to its global outlook. Our own forecast of 2.8 percent global GDP growth in 2012 and 3.1 percent growth in 2013 is half a percentage point below the IMF’s new weaker forecast. In other words, we think there is downside risk to the IMF’s outlook. In a slow global growth climate, it is tough to see how trade could be a significant boost to GDP next year.