Fundamental Analysis

The Hunt for Red October: Widening in the Trade Deficit

Typography

The trade deficit moved deeper into the red in October as imports surged 1.6 percent and exports were essentially flat. Though storm effects linger, we anticipate trade going from a help to a hindrance for GDP.

Riders on the Storm

The data in today's trade report for the month of October are still being influenced by Hurricanes Harvey, Irma and Maria and on that basis need to be taken with a grain of salt. A supplementary note explained that the Bureau of Economic Analysis and the Census Bureau (which together publish the trade figures) cannot isolate the effects of the storms and that in coming months the revised data will play an important role in providing additional inputs for a more complete read on the storms' impacts.

That may take the sting out of the fact that exports stalled in the month. In fact, goods exports actually fell just over $300 million and services exports increased $301 million for an overall increase of just $21 million - a drop in the bucket for the overall export figure of nearly $200 billion.

In terms of the underlying details on the export side, a $2.6 billion increase in exports of industrial supplies and materials nearly offset declines in exports of civilian aircraft ($1.1 billion) as well as a slip in exports of soybeans ($1.4 billion).

Imports posted the largest monthly gain since January increasing $3.5 billion on the goods side and a scant $300 million on the service side. Goods imports in the United States typically outweigh service imports by a ratio of more than four to one. Almost half of the increase on the goods side came from a $1.5 billion increase in crude oil imports. Other import categories that were up in the month included industrial supplies, automobiles and consumer goods.

The surging imports, particularly in categories like consumer goods and autos, are consistent with our expectation that holiday sales will be strong this year and may reflect storekeepers and online vendors taking on stock in expectation of increased spending amid the highest levels of consumer confidence in more than 15 years.

Down Where the Trade Winds Play, Down Where You Lose a Day

Trade has added to growth in each of the first three quarters of 2017, but today's report for October is consistent with our forecast that the fourth quarter will mark a turning point and that trade will weigh on GDP during the period.

Our baseline expectation is that the year ahead will be characterized by steady growth in domestic demand which, if realized, would be consistent with steady import growth. The global economic backdrop has improved throughout this year but is not expected to accelerate meaningfully in the year ahead. On that basis, we would expect to see import growth out-pacing gains on the export side of the ledger which is why we are forecasting that trade will be a modest headwind to growth throughout next year.

Author: Wells Fargo SecuritiesWebsite: http://www.wellsfargo.com/
Wells Fargo Securities
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