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

The 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.

Exports of goods and services fell 2.0% M/M. Most goods export categories declined, led by other merchandise (-10.2%), industrial supplies (-5.9%), autos (-3.8%), and consumer goods ex-autos (-3.5%). In contrast, exports of capital goods ex-autos were marginally up 0.3%, while the services exports were a bright spot, rising +0.6%.

"Imports rose 1.2% with broad-based increases in other merchandise goods (+9.9%), non-food consumer goods ex-autos (+8.4%), and capital goods ex-autos (+2.2%). The only major category to see a decline was industrial supplies (-5.3% M/M), a category which includes oil", says TD Economics.

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%.

Across countries, the trade deficit in goods widened vis-à-vis Canada (-$0.2bn to -$2.2bn), Mexico (-$1.5bn to -$5.3bn), the EU ex-UK (-$1.4bn to -$14.2bn), the UK (-$0.7bn to -$0.3bn), China (-$4.2bn to -$32.9bn). The trade surplus rose with respect to South America (+$0.7bn to $3.3bn), OPEC countries (+$0.35bn to $1.0bn), while the deficit with Japan was largely unchanged.

Largely telegraphed in last week's advanced estimate of goods trade, this was an unequestionably disappointing report. July's improvement has been completed unwound, indicating that net trade is set to exert quite significant drag on the economy again in the third quarter.

Of course, one month doth not a trend make - we saw a similar sharp deterioration external trade 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.

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 fourth quarter in Congress", added TD Economics.