Trade Deficit Widens at End of 2022

The trade deficit widened by 10.5% in December to $67.4 billion from $61 billion in December, following an upward revision to the deficit in November. The December print came in slightly better than market forecasts due to a services surplus offsetting the goods deficit. Even as the Federal Reserve hiked rates in 2022, the U.S. fared better than the broader, global economy, prompting an import-driven increase in the deficit of 12.2% year-over-year. 

The U.S. trade deficit was hit on both sides by a decrease of 0.9% in exports and a broad-based increase of 1.3% in imports. Exports declined for the fourth straight month, while imports were buoyed by a strong U.S. dollar at the time of December orders. However, since October, the dollar has been on a slide indicating a shrinking deficit in the coming months driven by stronger export growth.   

A mild contraction is expected for the U.S. economy in 2023 as the Fed is expected to conduct at least two more rate increases to tamp down slowing inflation. The consumer seems hesitant to engage in normal spending behavior, which is causing concern, as home buying is the largest driver of purchases and is already in recession. Later in the year, the dollar is expected to rebound and provide continued support for imports. 

The decrease in exports in December was driven in large part by industrial supplies, as nonmonetary gold and crude oil posted declines of 45% and 8%, respectively. Transportation goods kept exports afloat with strong growth coming from civilian aircraft.

Import growth was driven by consumer goods and automotive vehicles while industrial supplies and materials were a drag. Consumer goods rose 7%, led almost entirely by a strong bounce in cell phones, which were coming off of a disappointing November.  Last month’s laggards of toys, games and sporting goods and cotton apparel showed minor rebounds.  Automotive vehicles and parts showed signs of life across the board, especially in passenger cars which picked up 12%.  Industrial supplies and materials were led lower by fuel oil and organic chemicals. It appears fears of an impending 2023 recession didn’t slow imports.  

Globally, the United States’ deficit with the European Union shrank 5% to $18.6 billion while the deficit with China grew 15% to $22.8 billion.  In the case of the E.U., the U.S. saw increases in exports outweigh a contemporaneous increase in imports. This is counter to trade with China which was hit from both decreased exports and increased imports. Global demand factors seem to have turned a corner with the Euro Area, avoiding a contraction in a warmer-than-expected winter, pulling down energy costs and prompting increased consumption and investment.   
 
China’s sudden reopening should release a wave of pent-up demand in the short term, although long-run effects remain opaque due to a weakening housing market.  This demand fervor can be somewhat tempered by The Conference Board’s Global Leading Economic Indicator Index, which declined year-over-year for both emerging and mature economies.   

Bottom Line:

The trade deficit widened to close out 2022 due to imports coming in stronger than exports. In 2023, the deficit is expected to narrow as the global consumer reemerges and softer U.S. consumer spending drags on growth.