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Wider Trade Deficit Isn't Shocking as US Expands Faster Than Rivals

Wider Trade Deficit Isn't Shocking as US Expands Faster Than Rivals
(Igor Stevanovic/Dreamstime)

Thursday, 05 April 2018 12:57 PM Current | Bio | Archive

INDICATOR: February Trade Deficit, March Layoffs and Weekly Jobless Claims

KEY DATA: Deficit: $57.6 billion ($0.9 bil. wider); Exports: up $3.5 bil.; Imports: up $4.4 bil./ Layoffs: 60,357/ Claims: +24,000

IN A NUTSHELL: “The trade deficit keeps widening as strong U.S. growth is causing imports to increase faster than exports.”

WHAT IT MEANS: With tariff threats being tossed out like scuffed up baseballs, here comes the monthly trade deficit. And it showed that the shortfall with the rest of the world widened again in February. But this report really is not a bad one, though it does indicate that trade likely have restrained growth, possibly greatly, in the first quarter. The reason is simple: Both exports and imports increased. It’s just that import growth is greater than export gains. But even there, the issue is not that dire. Much of the widening in the deficit came from commodity price increases. On an inflation-adjusted basis, the deficit actually narrowed a little. Still, it is quite large, though nothing like we saw a decade ago. As for the details, U.S. firms sold a lot more industrial supplies, capital goods and vehicles, but our shipments of consumer products, mostly pharmaceuticals, was down. Sales of food products were basically the same as in January. On the import side, we bought more of just about everything except cell phones. Indeed, the $1 billion drop in purchases of foreign cell phones was the one thing to keep the deficit from really ballooning. I suspect that may change quickly. As for the deficit with China, it narrowed, which it seems to do in February. So far this year, the goods deficit with China has deteriorated by 15%. The deficit with China constitutes about 55.5% of the total deficit. The trade deficit with Mexico has increased by about 4% so far this year, while it is down about 40% with Canada. Two months is too short a time to make any determination about the direction of the deficits.

Challenger, Gray and Christmas reported that layoffs soared in March, rising to the highest level since April 2016. This was a huge 71% more than the number announced in February and over 39% higher than reported last March. Much of the increase came from the retail sector, which continues to shed workers like crazy. With the dearth of qualified workers looking for jobs, I suspect those who are eventually cut will have a decent shot finding work in other sectors. Still, the level of layoffs might be indicating that the job market is cooling a touch.

A second indicator, jobless claims, also pointed to a possible moderation in hiring. The surge in claims last week is not a major concern as these data are volatile and the four-week moving average remains incredibly low.

MARKETS AND FED POLICY IMPLICATIONS: Just what we needed, another report that the trade deficit widened. But if the shortfall is to worsen, it is better it happen because imports increase faster than exports. If both are rising, it indicates that there is growth around the world. The U.S. continues to expand faster than most other industrialized countries, so it should not surprise anyone that the trade deficit is worsening. Tariffs may sound like a good way to change the pattern of trade, but they tend to raise prices rather modify the trade fundamentals. If there is domestic capacity to meet the demand, the price will rise to reflect the price increase created by the tariffs. There is little reason for U.S. firms to price much below the foreign cost. It is actually possible that domestic supply doesn’t expand much if foreign producers eat some of the tariffs and still underprice higher-cost domestic producers. A rising dollar would make that outcome more likely. If there isn’t domestic capacity, prices will simply rise to match the tariff costs. Thus, tariffs are not very good mechanisms for allocating supply as they raise prices, reduce demand and lower standards of living. Are they good bargaining chips? It depends upon who has the greater capacity to absorb pain. The Chinese have shown they are more than willing to match U.S. tariffs and they are doing it in a way that causes the greatest economic and political pain. So the chip may not be worth very much. We will see how this all works out over the next few months as I don’t think U.S. farmers and manufacturers are going to tolerate the loss of income for very long.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.


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The trade deficit keeps widening as strong U.S. growth is causing imports to increase faster than exports.
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Thursday, 05 April 2018 12:57 PM
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