The U.S. trade deficit increased again in January as the U.S. economy continued to be stronger than expected.

The trade deficit for goods and services in January reached $68.3 billion — an increase of $1.1 billion over the revised December figure of $67.2 billion, according to a joint statement released Wednesday by the U.S. Census Bureau and the Bureau of Economic Analysis. 

The data shows that  imports are fueling the U.S. economy’s strength, which is one of the factors that is leading the Federal Reserve Board to consider raising interest rates further. But while some economists are concerned that higher interest rates could trigger a recession, for now that seems to be far off.

Since the economy is growing at about 2.5%, said Steven Richhuto,  chief economist at Mizuho Securities USA, “ that’s still enough growth to keep the overall global economy moving forward and that’s going counter to what overseas central bankers are attempting to do themselves.”

However, increasing interest rates are leading to a stronger dollar, raising the cost of theU.S. exports. It also makes imports less expensive. Interest rates are “going to make U.S. exports less competitively priced on the international stage,” said James Knightley, the chief international economist in ING Financial Markets. “But it’s also going to make imports a little bit cheaper as well, so that could, again, also be a factor that keeps the trade balance a little bit wider in the near term.”

Specifically, exports increased by $8.5 billion, to $257.5 billion, while imports increased by $9.6 billion, to $325.8 billion. The data also shows an increased trade deficit in January, when the goods deficit declined by $0.6 billion, to $90.1 billion, but the surplus in services declined by $1.7 billion, to $21.8 billion. These figures suggest that the United States is increasingly dependent on international trade and may face challenges in maintaining a positive trade balance.

 The surge in imports of services was fueled by the growing number of American travelers venturing abroad and spending on tourism, accommodation, and related services. At the same time, the boost in imports of goods is attributed to higher consumer demand for certain items, such as toys, games, cell phones, and vehicles, which are presumably manufactured overseas and then imported into the United States. These findings shed light on the factors driving the overall increase in imports of both services and goods.

 The U.S. trade deficit with China stood at $25.1 billion in January, with the U.S. exporting $13.1 billion and importing $38.2 billion. These figures are influenced by a strong seasonal pattern that typically affects theU.S. exports to China. While the lifting of COVID-19 restrictions should normally boost U.S. exports to China, this seasonal pattern tends to dominate the effect.

The peak of U.S. exports to China usually occurs in the fourth quarter of the year, around the same time as imports. However, exports then drop to a trough in February, coinciding with the Chinese New Year celebrations. Consequently, despite the potential benefit of lifting COVID-19 restrictions, U.S. exports to China are currently slowing down and approaching the seasonal trough.

The trade deficit with India has surged to a record high. The deficit increased by $1.2 billion to $4.5 billion in January, as U.S. imports from India rose by $1.3 billion to $7.7 billion, outpacing the increase in U.S. exports to India. This growing trade imbalance between the two countries could have significant implications for their trade relationship, and wider economic impacts for the U.S.

“The trade deficit remains unsustainably high. An overly strong dollar, one of the side effects of the Federal Reserve’s interest rate actions, continues to hamper export performance,” twitted Scott Paul president of the Alliance for American Manufacturing. “Much attention has been focused on de-risking supply chains and moving production out of China. The record monthly trade deficit with India may be one indication that is partially underway, but the import totals from China are still massive.”