By Nico Grant
The U.S. trade deficit widened in January, with slumps in exports and imports signaling that weak overseas economies are taking a toll on the U.S.
The trade deficit for goods and services grew to $45.7 billion, an increase of $1 billion compared to December’s revised figure of $44.7 billion. The strong dollar and weak global demand are reducing exports at the same time global uncertainty is hurting imports.
The result is a 5 percent increase in the trade deficit year-over-year from January 2015. At the heart of this is a steep $12.5 billion slide in exports.
The trade balance report was released on the same day as February’s jobs numbers, which showed that the economy added a better-than-expected 242,000 jobs. The unemployment rate is stable at 4.9 percent; consumer income, retail sales and durable goods sales are up. Trade and manufacturing appear to be the weakest parts of the economy.
The Federal Reserve raised interest rates in December because it assessed the economy was improving. This policy has contributed to the dollar’s appreciation in value. The Fed may again raise rates in March, but the volatile stock market and other factors may force it to reconsider.
“The dollar has strengthened based on our relative performance compared to other economies,” said Brittany Baumann, an economist at Credit Agricole. “Other advanced economies are easing monetary policy while we began to tighten it.”
The result is that American goods are more expensive on global marketplaces, making foreign companies and consumers less likely to buy them.
Furthermore, foreign economies are losing momentum, reducing their demand for goods. As their economies stall, their businesses are starting to export less. The $2.8 billion decrease in imports between December 2015 and January 2016 may be most troubling.
“I find the steady decline we’ve seen in imports over the past several months is a little concerning,” said Baumann. “If we have solid consumer spending, we should be seeing a little growth on imports.”
The drop in imports suggests weakness in foreign business sectors given that the strong dollar has made imported goods cheaper for Americans to buy.
The question facing economists and policymakers continues to be the extent to which external forces will hamper U.S. economic growth.
“The question is whether personal income will grow to keep up with the expansion,” Karp said. “Anything that gives us a better sense on the consumption side will allow us to assess the overall health of the economy.”
Recent economic data gives some reasons to be optimistic. Consumer spending rose in January by 0.5 percent. Personal income rose by the same amount in January. Meanwhile, auto sales leaped 7 percent in February.
Although the U.S. isn’t in a downturn, the pace of the expansion seems to be slowing. Real GDP growth was 3.9 percent in the second quarter of 2015, but only half that in the third quarter, and 1 percent in the fourth quarter. The rising trade deficit is only hurting matters.
Exports of industrial supplies and materials dropped by almost a billion dollars from December to January. Capital goods exports, excluding automobiles, slid $1.2 billion in the same time. Taken together, the numbers suggest turbulence for foreign companies as they reduce investment and their economies slow.
“We’re seeing that overall global trade is going down,” said Nathaniel Karp, an economist from BBVA Research. “Now it’s on the business side of the global economy. Things are weaker than we expect in the manufacturing sector.”
A positive note in the trade report is that the U.S. continues to have a services trade surplus, exporting $18 billion more than it imported in January. Unfortunately, service jobs are not as high-paying as goods-producing jobs.
There was also good news for American carmakers, which have already been having a good year with high auto sales. There was a modest $19 million surplus in automotive vehicles, parts and engines.
The surplus is even higher excluding trucks, buses and special purpose vehicle exports, which declined. This shows that foreign companies are cutting back.
Overall, slowing international investment is a troubling sign for U.S. manufacturers, which won’t be able to grow through exports. U.S. exports support almost 12 million American jobs, according to the Department of Commerce.
Instead, American manufacturers will have to rely on U.S. companies and consumers to power their growth. U.S. manufacturing jobs pay more than other blue-collar jobs, making them crucial to the workers in the sector and for the overall economy.
Trade will continue to be a drag on gross domestic product in 2016, since the strong dollar and weak global economies are likely to persist. But the American economy may continue to grow despite the trade slowdown.