Trade flows strengthened in March

Summary

• Trade flows rebounded in March with both exports and imports rising at their fastest pace since July.

• The trade balance widened to a record deficit of $74.4 billion as the gain in imports outpaced exports.

• The U.S. economy continues to lead the way in vaccinations, which is fueling a speed in her domestic recovery and therefore rebound in imports.

U.S. trade deficit widens to fresh record

Trade flows strengthened in March with both exports (+6.6%) and imports (+6.3%) rising at their fastest pace since July. But as the $12.4 billion gain in exports was beaten by a $16.4billion increase in imports, the trade balanced widened further to a record decit of $74.4billion.

The underlying details of the report came in largely as expected. After weathering disruptions and supply challenges in February, trade picked up in March. March's report confirms what we already know from last week's Q1 GDP data; net exports subtracted roughly 0.9percentage points from headline GDP growth during the quarter.

Strong U.S. rebound reflected in imports

The United States is leading the way in vaccinations and stimulus support to households and businesses, and this continues to be reflected in stronger import growth. Despite continued transportation bottlenecks and port congestion, imports rose to a record $274.5 billion in March. Gains were broad-based with every major goods category rising. Digging into the details we see what the domestic data on manufacturing and consumption have already demonstrated; supply and demand are out of whack. Imports are helping make up for the imbalance.

Capital goods imports rose $3.3 billion in March and were supported by a $1.3 billion gain in semiconductor imports. As the global semiconductor shortage worsens, domestic manufactures are struggling to get the key input which is leading to idled production lines and weighing on already lean inventories. Imports of passenger cars also posted a strong $983 million gain in March, as shortages weigh on domestic production of vehicles. This has not stopped sales, however, with U.S. auto sales surging in recent months. Consumer goods imports surged to an all-time high in March and taking a deeper look, the top categories of imports(apparel, furniture, toys, footwear, appliances) continue to reflect strong domestic demand for goods amid exceptionally lean retail inventories.

Exports finally moving in the right direction?

Exports also rose at a solid clip in March but continue to be outpaced by imports. Weakness in exports reflects anemic growth in many of America's major trading partners, which generally are lagging the United States in vaccinations. The March report, however, suggests exports may be beginning to turn a corner. Every major end-use category of goods exports improved during the month and goods exports are now back above their pre-COVID February 2020 level.

While the goods trade deficit grew by $3.6 billion in March, the services trade surplus also got $0.3 billion smaller. Services trade remains significantly below its pre-virus position as the services economy remains particularly constrained by virus restrictions. As vaccinations gain more momentum abroad and the global recovery gains pace, trade should begin to normalize. Export growth should begin to rival import growth, which will remain supported by a surge in domestic consumer and business demand. 

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