Economists are predicting that the international trade report for March, to be released on Thursday, will show the U.S. trade deficit narrowed from $70.5 billion to $64 billion. Here are five things to watch for in the report.
Increased Exports, Decreased Imports
One key factor contributing to the narrowing of the trade deficit is an increase in exports because of higher demand for American goods from overseas markets. But this boost may not be sustainable in the long term, as foreign central banks continue to raise interest rates, which could slow their economies and limit demand for U.S. exports.
Another factor is a smaller decrease in imports than in February, likely because the U.S. economy is transitioning away from spending for goods and toward more spending for services, reducing demand for imports. In addition, businesses are adding to inventories at a slower pace because of concerns about the economic outlook, which is also reducing demand for imports.
U.S. Auto Exports Surged in March While Imports Declined
In March, U.S. auto imports increased significantly, but auto imports declined slightly, economists said. This swing in the auto industry was part of the reason for the overall change in trade balances.
In the oil market, a drop in prices also impacted both imports and exports. But import volume was weak, resulting in a projected improvement for the U.S. in the petroleum balance for the month. In the service sector, however, a decline in both exports and imports is expected, with the same service surplus as in February. The swing in trade balances comes primarily in goods and may not have had much impact on the service sector.
Normalization of the Dollar
The U.S. dollar has been strong for the past couple of years because of aggressive rate hikes by the Federal Reserve. But the Fed is now expected to make its last rate hike soon and may even begin to reduce interest rates. This could weaken the dollar, possibly improving trade through better terms. The dollar has already been weakening for six months, suggesting that this effect may already be taking place. The impact of currency exchange rates on trade is complex, and it can be difficult to interpret monthly swings in the trade deficit, economists said.
Supply Chain Disruptions and Semiconductor Shortage
The continuing supply chain disruptions and semiconductor shortage have had a significant impact on international trade. Because of supply-chain disruptions in the early stages of pandemic recovery, American businesses scrambled to get as much inventory as they could. Now supply chains are functioning much more normally, and emergency demand for products from American importers has gone away. The expected reduction in imports in the March report would reflect better-functioning supply chains.
Geopolitical Events and Seasonal Disruptions
The conflict in Ukraine has given the U.S. a significant opportunity to increase export of food, military equipment and energy to Europe. But this geopolitical event is not the only factor driving shifts in global trade flows.
China’s Covid lockdowns in late 2022 created disrupted seasonal patterns of trade that caused significant impact on global trade flows. Last year, port bottlenecks caused delays in holiday goods, leading to a massive increase in imports recorded in March 2022. This year, the deficit is expected to have narrowed, suggesting that trade may have overshot in the opposite direction and may now be underperforming.