The Imbalance of Trade – US Trade Deficit
With most, if not all attention from investors focused on the Federal Reserve’s plan to curb inflation, there continues to be several economic inefficiencies that pose threats to the fabled “soft landing”. One of these threats that has been overlooked is the United States trade deficit, which continues to dangerously linger far above pre-pandemic levels. The trade deficit refers to the balance between a country’s imports and exports, specifically the figure to which a country’s imports exceed their exports. Ever since major booms of international oil and consumer products, the United States has operated in a consistent trade deficit for almost 48 years. Just before the pandemic struck in 2020, the US trade deficit lingered around $40 billion, where it then took a steep plummet to over $100 billion in early 2022. Since then, the deficit has narrowed greatly, but throughout 2023, the figure has whipsawed between $60 and $70 billion.
The most recent reading comes from July when the trade deficit widened to $65 billion. Although this number was far better than the estimated $68 billion for the month, it remains over 60% greater than it was before the pandemic. Due to exchange-rate fluctuations from larger operations in foreign currencies, higher levels of trade deficit can mean increased inflation for the country’s economy. However, this isn’t always the case, as steady disinflation in the last year has also co-existed with the narrowing of the US’s deficit. What could be causing these larger-than-previously seen numbers could be a variety of things, such as sluggish economic action for domestic services and pushes from countries such as China against the use of US products. Regardless, the better-than-expected ratio of exports to imports will signify a more robust reading for third-quarter GDP, which could catch the attention of the Federal Reserve.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
