Straight and narrow: Fifth straight narrowing in US trade deficit

Summary

The U.S. deficit in international trade narrowed for the fifth consecutive month in August. But despite the recent sharp narrowing, the U.S. is still running an outsized deficit compared to prior to what prevailed pre-pandemic. The sharp narrowing to date can be traced to slower import growth specifically, and the August data position net exports to be a considerable boost to third quarter growth, likely more than the three percentage points we are presently forecasting.

The narrowing continues

The U.S. trade deficit narrowed to $67.4 billion in August from $70.5 billion previously. August marked the fifth consecutive month that the balance has narrowed and leaves the deficit 37% smaller than it was at its peak back in March of this year. Even with the sharp narrowing, the U.S. continues to run an outsized deficit compared to prior to the pandemic–in 2019, the deficit averaged "just" $46.6 billion.

The U.S. imported about 7% less in August than it did in March, and it is this pronounced slowdown in import growth specifically that has led the recent deficit narrowing. One-off factors associated with supply chain normalization and geopolitical issues are mainly driving import growth lower. More significant underlying shifts from slowing consumer demand and out-of-whack inventories are likely also contributing to the slowdown in imports.

For August, the $3.7 billion decline in imports can be traced to a few categories. There was a large decline in the imports of industrial supplies and materials, but a $2.7 billion decline in crude oil specifically accounted for about 60% of the decline in the overall category. Weakness in capital goods was more broad based and a $2.0 billion gain in pharmaceutical preparations prevented consumer goods imports from declining. There was some positive news in the fact that imports of passenger cars rose $1.6 billion in August, signaling the recent easing in supply is allowing movement in the still-hard hit sector. $40 $80 $120 $160 $200 $240 $280 $320 $40 $80 $120 $160 $200 $240 $280 $320 00 02 04 06 08 10 12 14 16 18 20 22 Thousands Billions of USD Total Goods Exports: Aug @ $180.4B Total Goods Imports: Aug @ $267.7B Source: U.S. Department of Commerce and Wells Fargo Economics

Exports also pulled back modestly in August, declining $0.7 billion. Export growth has held up better in recent months and has also contributed to the narrowing in the deficit. But exports also face their fair share of challenges.

The global economy is rapidly slowing, particularly in Europe, and the stronger dollar makes U.S. goods less competitive abroad. The war between Russia and Ukraine should continue to provide a modest offset, as the U.S. has been supplying more of the products at the center of the conflict. U.S. exports of natural gas rose $1.4 billion, and are running 75% higher year-to-date compared to last year. Fertilizer exports also rose $174 million, while LNG exports were up $165 million. Still overall goods exports declined for the second consecutive month, and the slowing global economy may continue to weigh on export growth.

Services trade has also been particularly volatile. The U.S. has historically run a trade surplus, but it has narrowed throughout the pandemic. The surplus in services trade declined to $20.2 billion in August, which puts the surplus about 18% below where it stood pre-pandemic. A continued rebound in services exports would contribute to a further narrowing in the overall trade deficit.

The August trade data position net exports to provide a sizable boost to headline GDP growth in the third quarter. Real goods exports rose slightly more than we had anticipated, up 1.8%, while real goods imports declined 0.5%. Our currently published forecast has net exports boosting growth by about three percentage points, and today's data suggest some upside risk to that estimate.

Download The Full Economic Indicator