US Trade Deficit Widens Slightly

In March, the U.S. trade deficit was $27.6 billion, up from a revised $26.1 billion in February.  Both imports and exports fell, but at a much slower rate than we have seen in recent months.

As the Chart below shows (larger version available at http://www.calculatedriskblog.com/) over the last year the improvement in the trade deficit has been dramatic (so much for the thought that the trade and fiscal deficits were related). Most of the recent improvement can be traced to the falling price of oil (black line).

The non-oil side of the trade deficit actually started to improve in late 2006, but was masked by the run-up in oil prices. With oil prices rebounding (although well off the levels of a year ago) this source of improvement in the trade picture will start to dissipate (indeed if you look closely it already has). The widening of the trade gap in March was due to exports dropping by $3.0 billion from the February level of $126.6 billion while imports fell just $1.6 billion.

The deterioration in the trade balance may cause the first quarter GDP numbers to be revised downward from the -6.1% level originally reported. Still, I think it is more important to focus on the huge year-over-year improvement we are seeing in the trade deficit rather than the rather small reversal of the trend in March. This is true even if the improvement is coming the “wrong way” - from imports generally falling faster than exports, rather than from an increase in exports exceeding an increase in imports. Even there, the decline in trade in March on both sides of the ledger is smaller than we had been seeing.

In part, however, the decline in imports is linked to the decline in exports, since a big portion of imports represent components of goods that are then exported. Other than that, though, the decline on both sides is a reflection of lower overall demand. Demand is lower here, partly from retailers like Wal-Mart (WMT) and Target (TGT) thinning out their inventories, and partly from their customers buying less of the stuff on their shelves, a very large percentage of which comes from overseas.

The same thing is happening overseas, which is driving down our exports. However, we generally export fewer direct consumer items. Then again, we do export a lot of industrial machinery and things like chemicals that eventually are used to make consumer goods. If end demand is down, then businesses do not want to spend money on new machines to expand production, and they will need less intermediate goods like those chemicals.

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