Stronger dollar contributes to trade deficit

July 8, 2024

The US trade deficit widened to $75.1 billion in May, a 0.8% increase in the deficit, making it the largest deficit since October 2022. The increase was driven by a large drop in exports that outpaced a fall in imports. In real terms, the deficit increased 0.5% as import prices fell 0.4% while export prices fell 0.6%.

Imports fell 0.3%, or $1.2 billion, as the initial rush to get imports in before the summer supply chain disruptions and new tariffs. Many importers engaged in early fall and winter ordering this year to avoid potential disruptions from what is expected to be a record-breaking storm season and potential labor strikes at US ports. That has shown up in inventories for the past several months. However, recent retail sales and consumer credit reports show that consumers have become more cautious. Imports of consumer goods and automobiles fell dramatically in May as a result, even as inventories among motor vehicle and parts dealers and wholesalers jumped.

Consumer goods fell $2 billion mainly on pharmaceuticals and apparel but showed some increases in previously struggling areas like cell phones and household appliances. Capital goods were essentially flat as decreases in aircraft and tariff-affected products offset increases in drilling equipment and computers. Industrial supplies were the only goods category to show significant increases. Crude oil drove the gains, up $1.0 billion, as well as nuclear fuel materials, copper and fuel oil.

Imports of services rose nearly $1 billion on travel and transport services. May was a record-breaking month for Memorial Day weekend travel.

The new tariffs showed up as decreases in imports of the affected products, which jumped in March and April. The new rounds of tariffs included steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes and medical products, most of which were flat or negative in May. Automobiles and parts in particular, sales of which have been struggling under higher rates, fell $1.5 billion even as inventories were built.

Exports fell 0.7%, or $1.8 billion, on weak orders for industrial supplies and automobiles. Industrial supplies fell $2.1 billion on petroleum-related products, fuel oil, liquid natural gas and chemicals, even as exports of crude oil increased. Exports of nonmonetary gold, which is used either for industrial (jewelry, electronic equipment) or investment purposes fell by over $500 million alone. Exports of trucks, buses and special purpose vehicles, as well as automotive parts and accessories, drove the decline of $473 million in that category. Falling orders for civilian aircraft drove declines in capital goods.

The bright spot in exports was on the consumer side; both consumer goods exports and exports of services increased. Consumer goods exports increased for luxury goods such as diamonds and artwork. Most other categories were essentially flat, with the exception of pharmaceuticals, which were negative. Exports of services rose $1.1 billion as exports of travel increased.

The second quarter so far has bucked the trend of nearshoring in the data by country. The deficit with China has increased as exports fell and imports increased in May. However, the same goes for Mexico and Canada, where larger deficits were recorded. Much of that could be related to tariffs and so revert to the trend of imports coming from closer allies.