Trade Deficit Widens Modestly in May

Following some volatility earlier this year, the U.S. trade deficit appears to be settling down. Net exports likely will have little effect on overall GDP growth in the second quarter.

Trade Deficit Seems to be Settling Down After Previous Volatility

Data released this morning showed that the U.S. trade deficit widened from $40.7 billion in April to $41.9 billion in May, which was about $1 billion lower than the market consensus forecast (top chart). Although imports of goods and services edged down by $300 million in May, the trade deficit widened on account of the $1.5 billion decline in exports that occurred during the month.

The weakness on the export side of the ledger was concentrated in exports of capital goods, which fell by $2.4 billion in May. Specifically, exports of civilian aircraft, which can be quite volatile on a month-by-month basis, dropped by $1.2 billion in May. Outside of capital goods, most broad categories of exports posted modest gains during the month, including the $804 million rise in exports of industrial supplies and materials. That said, the underlying trend in real export growth appears to be weak at present (middle graph). Overall export growth is being held back at present by slow economic growth in some of America’s trading partners as well as by the appreciation of the dollar that has occurred over the past year.

As noted above, imports were more or less flat during the month. Although the volume of petroleum imports, which has been trending lower for the past few years, fell by 4.0 percent in May, the upward creep in oil prices that has occurred since March helped to support the overall value of petroleum imports. Non-petroleum imports fell by nearly $400 million during the month due in part to the $800 million decline in imports of drilling and oilfield equipment.

More broadly, the distortions in imports that were caused by the labor disruptions at West Coast ports appear to have run their course. The volume of imports dropped about 3 percent in February due to the disruptions, only to surge 9 percent in March when the stoppages ended and waiting cargo ships were finally offloaded. Import volumes appear now to have largely returned to their underlying trend.

Net Exports Should Have Little Effect on Q2 GDP Growth

The distortions in import volumes noted above exerted a significant effect on real GDP growth in the first quarter. Indeed, the significant widening in the real trade deficit that occurred in the first three months of the year sliced 1.9 percentage points off of overall GDP growth in Q1 (bottom chart). If export and import volumes are unchanged in June relative to May, then net exports likely will have little effect on overall GDP growth in the second quarter. That said, we forecast that net exports will exert modest headwinds on U.S. GDP growth in coming quarters. Slow growth abroad likely will restrain American export growth while solid growth in U.S. domestic demand will continue to pull in imports.