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Economic Forecasts

Trade Deficit Grows in First Quarter

Kiplinger's latest forecast on the direction of the trade deficit

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The U.S. trade deficit expanded significantly in the first three months of 2017, presenting another conundrum to a Trump administration set on shrinking persistent shortfalls. The U.S.’s deficit with the rest of the world is on track to rise 4% from those of 2015 and 2016, when the annual gap topped $500 billion.

The cumulative shortfall in the first three months of 2017 shot up 7.5% to $135.6 billion. But that rate should ease as the dollar’s appreciation levels off.

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On the campaign trail. President Trump railed against the trend of growing deficits, which he blames on unfair trade practices by China and others, and pledged to stem it. That’s a hard promise to keep when a relatively robust U.S. economy pulls in more imports, and strong labor markets fatten consumers’ wallets.

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The dollar’s appreciation over the last one and a half years doesn’t help. It simultaneously ups the prices of exports and cheapens those of imports. But recent modest gains against the dollar by Japan’s yen and the euro offer U.S. exporters some relief.

Stronger global growth would boost demand for U.S. exports. Stronger European manufacturing and dropping unemployment rates indicate a modest pickup ahead. The French election, which ushered in a centrist government, boosted confidence in the 28-nation European Union, the world’s largest trading bloc. That in turn lifted markets and potentially freed up some spending power. If that translates into more exports to the EU, it could curb the deficit’s growth rate this year. The value of total goods-and-services exports to all overseas markets in the first quarter increased by 7.1% from the comparable period in 2016, exactly matching the rise in imports during the same period.

Beyond promising to stem the trade deficit, the Trump administration hasn’t outlined its trade policy. President Trump reneged on a threat to brand China a currency manipulator, despite claiming that Beijing controls its yuan to give Chinese exporters a price advantage. He also threatened to pull out of the North American Free Trade Agreement with Canada and Mexico. Now he says he just wants to renegotiate it.

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Sources: Department of Commerce, Trade Data