February international trade report will be released Wednesday. Economists foresee a slight increase in the trade deficit due to a drop in exports. They also expect a reduction in imports, which would point to a weakening of domestic demand after a strong January. Here are five things to see in the report.

Deficit rises as exports fall

Economists estimate that the trade deficit in goods and services will rise to around $68.8 billion in February. This is an increase of less than 1% from the previous month. The main reason is an expected drop in exports to about $250 billion, almost 3% down from January. The decline was predictable: January was an exceptionally strong month for international trade. Both exports and imports then recorded the biggest jump since the beginning of the war in Ukraine.

Lower imports, a sign of a weakening domestic economy

Projections point to a reduction in imports to $320 billion, about 2% less than in January. Analysts stress that this decline is consistent with domestic demand weakness. It would be an early sign of an economic slowdown. In January the labor market was very robust and in February it showed some signs of cooling, as did consumer spending. These variables drive imports.

Federal Reserve policy effects

To fight inflation, the Federal Reserve has raised interest rates beginning in March 2022 at the fastest pace since the late 1970s. That impacts international trade in two opposite ways. On the one hand, it makes U.S. goods more expensive and foreign goods cheaper, which weakens exports and boosts imports. On the other hand, it reduces consumer spending and investment, which leads to a cut in imports. Analysts warn that the effect of policies needs time to spread in the economy. They predict that in the coming months, imports and exports will drop. 

The report collects data from the month before Silicon Valley Bank collapsed. The Federal Reserve believes the financial turmoil this has caused will translate into credit tightening. This would further curb demand and, therefore, imports.

Services surplus declines

Structurally, the U.S. has a trade deficit in goods and a surplus in services. But the services surplus contracted by 7% in January compared to the previous month. That was mainly due to tourism: more Americans traveled abroad that month, but fewer foreigners visited the country. The strong dollar due to monetary policy tightening fuels this dynamic.

Volatility and seasonality

Part of the decline in international trade in February could be due to volatility and seasonality. The largest declines are expected in the automobile sector and consumer goods. Both items increased considerably in January, so a slowdown in February was expected. In addition, vehicle imports and exports usually peak in January. For this reason, economists advise caution about looking for trends from international trade monthly evolution.