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Economic Forecasts

Exports Grow but Trade Deficit Rises

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

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Stronger economic growth in many of America’s major trading partners is boosting U.S. exports, but the U.S. trade deficit is still rising. The key reason: Imports are climbing because low unemployment and rising wages are putting more disposable income in consumers’ pockets, encouraging increasing spending on imported goods, from cars to computers to cell phones. That more than offsets the benefit of the depreciating dollar, which makes U.S. goods cheaper for foreign buyers. For full-year 2017, expect the shortfall between exports and imports to grow by 4% from the back-to-back $500-billion deficits posted in 2015 and 2016.

On balance, the trend in global trade is positive. Major economies in Europe, Asia and parts of Latin America are expanding. That has helped fuel a gradual pickup in exports of U.S.-made goods, which are up about 6% for the first seven months of the year. The problem is that imports of goods like computers, telecommunications equipment and automobiles are rising too, and at a slightly stronger pace of 6.7% from year-earlier levels, so the full-year trade deficit will top that of 2016.

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During July, exports weakened modestly by $565 million, but that came after June’s monthly total of $195 billion, the highest in two and a half years. Imports in July were down slightly less, by $400 million, to $238 billion. The net result was a less-than-expected widening in the monthly deficit to $43.7 billion.

Monthly trade patterns in coming months are uncertain because the impact of Hurricane Harvey — and potentially of Hurricane Irma — will distort data from August onward. Commodity prices and trade volumes will both be affected because Harvey hit the petroleum-refining areas along the Gulf Coast hard, slowing production and exports of finished goods.

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In addition, there is widespread uncertainty about the Trump administration’s trade policies and their potential effect on exports and imports. In one of its first acts, the administration pulled the United States out of the 12-nation Trans-Pacific Partnership, which would have brought free trade to 40% of the global economy. The North American Free Trade Agreement with Canada and Mexico is being renegotiated on the grounds that it is damaging U.S. manufacturing. In addition, President Trump has threatened to scrap a trade pact with South Korea and to stop engaging in trade with countries that do business with North Korea — presumably including China, which is one of the United States’ largest trading partners.

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Sources: Department of Commerce, Trade Data