Trade deficit reached $68.3B in January

The trade deficit widened by 1.6% in January to $68.3 billion from $67.2 billion, following a downward revision to the deficit in December. The January print came in slightly better than forecast due to imports underperforming exports. Year-over-year, the deficit fell 21.9% due to sizable increases in both goods and services exports.

The U.S. trade deficit increased due to imports outpacing exports in absolute terms with $9.6 billion and $8.5 billion, respectively. Both grew at similar rates with imports increasing 3.0% and exports growing 3.4%.  That represents a reversal for exports which had declined for four straight months. Imports were buoyed by a strong U.S. dollar at the time of January orders. Since October, the dollar has been on a slide, indicating a shrinking deficit in the coming months driven by stronger export growth. However, in the last month, hawkish statements by members of the Federal Reserve’s Federal Open Market Committee (FOMC) sent the dollar higher. 

A mild contraction is expected for the U.S. economy in mid-to-late-2023 as the Fed is expected to conduct at least two more rate increases to control reaccelerating inflation.  These rate hikes may be larger depending on the “totality of data” observed by the FOMC.  

Consumer spending on goods slid throughout 2022, while spending on services expanded.  Home buying remains in a recession and is expected to worsen throughout the year. This is an issue for trade, considering home buying is the largest driver of household purchases, including many home furnishings via imports.  However, there was life in January retail sales, which outpaced forecasts.

Exports gains were broad-based across all categories, driven in large part by consumer goods, which grew in nearly every subcategory. Pharmaceutical preparations posted a 38% bounce, representing two-thirds of consumer good growth, after a disappointing December. Capital goods were led higher by civilian aircraft. Industrial supplies and materials were headed for a contraction due to tumbling crude and fuel oil, but were saved by strong growth in nonmonetary gold and other petroleum products.  

Similar to exports, imports grew across the board. Nearly all growth can be attributed to automotive, vehicle parts and engines and consumer goods. The former being driven up 9% by trucks and buses as well as passenger cars. Consumer goods rose 6%, with cell phones parlaying a strong December into the new year. Pharmaceutical preparations and toys, games and sporting goods also posted strong gains. The growth in toys and cell phones was peculiar for January since sales in those categories are generally stronger during December’s holidays. It seems the possibility of a recession didn’t hinder imports.   

In services, the story was travel and transportation. Export travel and transport services accounted for most the decline, while import travel was mostly offset by transport to keep import services flat month-over-month.

Internationally, the United States’s deficit with Japan shrank 22% to $5.6 billion while the deficit with China lessened 4% to $21.9 billion. In the case of Japan, a decline in imports outweighed a contemporaneous export increase. Trade with China was boosted by 15% growth in exports.  Those export orders were placed months in advance of China’s reopening, so they should be unrelated to January’s observed export growth.  Somewhat tempering China’s reopening excitement were weaker-than-expected consumer goods demand and lack of support from the Chinese government. Consumer services demand, by way of tourism, is expected to pick up in the latter half of 2023, once travel visas are approved and airline capacities recover.  

The IMF increased its global output forecasts for 2023, while slightly downgrading 2024. Most key U.S. trading partners are now expected to see greater expansion than previously thought, which bodes well for the U.S. exports in the coming year. To counterbalance the IMF’s outlook, the Conference Board’s Global Leading Economic Indicator Index continued to trend down for nine of the twelve countries measured. Year-over-year, the index remained negative for both emerging and mature economies.  

Bottom Line:

The trade deficit widened at the start of 2023 on the heels of  stronger imports. This could dampen economic growth in the first quarter, which has been coming in hot. The larger issue is whether it is enough to stem inflation and stop the Fed from raising rates more aggressively; it is not.