Smaller trade deficit will boost 3Q GDP

October 6, 2023

The U.S. international trade deficit narrowed sharply during the month of August by more than expectations, down 9.9% from July to $58.3 billion. Exports continued to climb by 1.6% while imports fell by 0.7%. The deficit narrowed 20.7% from August 2022 as exports increased 1.1% year-over-year and imports decreased 4.3% year-over-year.

That marks a sharp reversal from the trend in trade for the second quarter, which had largely leveled out. The month of August set up trade to be a large positive contributor to an already strong third quarter.

Exports increased in August by $3.7 billion across a broad variety of products and services. Exports of crude and fuel oil both increased during the month as prices increased by double-digits in August. Exports of capital goods such as computers and semiconductors increased, along with consumer products, such pharmaceuticals, Exports of travel-related and financial services posted modest increases. The only outlier was motor vehicles and parts, which dropped during the month. Production slowed leading up to the UAW strike starting on September 15.

The cuts to the trade deficit came from both sides of the ledger as imports decreased by $2.6 billion. Those reductions were more than accounted for by consumer and capital goods when consumers pulled back on cell phones and household goods while businesses imported fewer chips and electrical materials. Offsetting those decreases were industrial supplies such as crude oil, petroleum-related products and finished metals: unsurprisingly, considering the bump of 0.5% in construction spending during the month, much of the increase came from computer and electronic manufacturing.

The smaller deficit stemmed from a continuing trend of decreasing imports from China as well as a few head fakes. For example, the monthly deficit with Mexico narrowed from a recorded $42.1 billion in July to $12.8 billion in August; the deficit with the European Union narrowed from $30.1 billion to $17.8 billion. Those were large, one-month movements outside of trend that are unlikely to stick.