Trade gap widens more than expected

The U.S. international trade deficit widened by 23.0% in April to $74.6 billion, more than expected after the first quarter deficit was revised down. That brings the deficit back to October’s level but is still off from the peak of $106.6 billion in March 2022. The trade deficit is now down 23.9% year-over-year as exports increased and imports decreased.

The increase in the deficit was largely driven by goods; the goods deficit increased 17%. The increase in the deficit came from both sides of the ledger. Falling exports of goods were driven by oil and consumer goods, while rising imports were largely driven by automotives, including finished cars, parts and accessories. Auto dealers are still trying to build up inventories, spurring retail inventories to increase 0.2% in April. That was not enough to offset a decrease in wholesale inventories as carrying costs continue to rise and demand falls.

Services were flat in April as exports of services increased slightly less than decreases in imports of services. The U.S. is exporting more travel, business services and financial services, but both travel and transport decreased in April after a wave of travel over spring breaks in March and Memorial Day travel booked for May.

On a country-by-country basis, the changes were mixed. The increase in the deficit came from multiple trading partners. The deficit with China had been shrinking in the first quarter, but it widened in April. Despite this, early data from May suggests that China’s exports to the U.S. and elsewhere are likely to fall later this year amid weaker global demand. Major global forecasters have revised their global growth estimates upward in April after China reopened and consumers showed signs of resilience against inflation headwinds and central bank increases; however, the global economy is still likely to experience slower growth in 2023. 

Bottom Line:

This month’s report wipes out the small positive contribution to GDP from trade in the first quarter of this year. We expect to see a wider trade deficit in the second quarter, meaning net exports will be a drag on the economy. While that means lower GDP growth, what it also indicates is that consumers are not pulling back as much as expected domestically. Consumption will offset slower growth from trade and investment in 2023.