Narrowing in trade balance likely not yet a sign of pandemic trend reversal
|Summary
The U.S. trade balance narrowed by $14.3 billion in October, which is only the second time such a gain has occurred in data going back to the early 1990s. The narrowing was driven by the largest gain in exports since coming out of lockdown in mid-2020, a welcomed development after imports have largely outpaced exports over the past year and a half. That said, our best read is that today's narrowing in the trade deficit is likely more a story of monthly volatility rather than the start of a sustained narrowing in the deficit.
Sharp narrowing in the US trade balance
U.S. exports surged 8.1% in October outpacing a more-modest 0.9% gain in imports. This pop-in exports caused the trade balance to narrow by $14.3 billion, again outpaced only once during the financial crisis of 2008 in data going back to the early-1990s. This narrowing left the U.S. trade balance at its lowest deficit in six months.
Throughout the pandemic, imports have rebounded much faster than exports as U.S. domestic demand has outpaced many international economies. While the trade balance has widened sharply since the onset of COVID (chart), trade flows have been highly volatile from month to month. Our best read is that today's narrowing in the trade deficit is likely more a story of monthly volatility rather than the start of a sustained narrowing in the deficit.
We still believe imports should cool off a bit as domestic demand transitions back to services, but the timeline of this eventual reprieve has grown more uncertain due to potential hiccups in the sector associated with the Omicron variant. Further, the need to replenish depleted inventory levels suggests imports will keep flowing in for some time even as demand more meaningfully subsides. In terms of exports, global growth may stumble again in the near term with the renewed spread of COVID cases, most notably in Europe and China, which will likely limit near-term growth in exports.
Regardless of if today's export surge is a one-off or the start of a sustained shift in trade flows, the October data positions net exports to provide a sizable boost to growth for the first time in five quarters in Q4.
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