Tepid global growth leads to substantial U.S. trade deficit widening

U.S. international trade deficit widened substantially to $48.3 billion in August, from $41.8 billion in July. The widening in the deficit was slightly worse than the 48.0bn expected by the market. With the exception of March 2015, which was distorted by port disruptions, this was the widest deficit since early 2012.

The sharp declines in both exports and imports of industrial supplies reflects the falling price of oil products, with the result that the trade deficit in petroleum products continued to narrow. 

The rise in the trade deficit was entirely due to a substantial deterioration in the ex-petroleum deficit. After controlling for price changes, real goods exports fell 1.5% M/M, while import volumes of goods surged by 3.1%.

Of course, one month is not trend making, a similar sharp deterioration external trade was seen in March, which was largely retraced in April. However, the West Coast port dispute had been partly to blame for the volatility seen then. This time around, the decline in real exports and substantial rise in real imports is indicative of tepid global demand, robust domestic activity, with the strong dollar also acting on the margins.

"Examining the geographical distribution of trade shows that with the exception of regions exporting oil to America, where falling prices are outweighing the impact of weakening demand in those regions, U.S. trade is coming under pressure pretty well across the board. This is true for countries whose currencies have fallen with respect to the dollar, as well as those such as the UK and China, whose currencies have been more stable", says TD Economics.

The fact that net trade is weighing on the U.S. economy was already a foregone conclusion. While the drag may be slightly more than expected, the U.S. outlook will depend on the strength of domestic activity, which so far has proven to be resilient to external factors.

"Trade has been in the news with the announcement of an agreement over the Trans-Pacific Partnership deal. Full details have yet to be announced, but given the scope of the agreement, covering 40% of global GDP, with more countries set to join over time, the impact on certain sectors will likely be sizable. Still, the impact of these agreements can take years to be observed. Meanwhile, the deal still needs to be ratified by national parliaments. This adds to what is expected to be a heated Q4 in Congress", added TD Economics.