‘Worsening’ Trade Could Adversely Affect US GDP as Deficit Jumps to Highest Level in Six Months
‘Worsening’ Trade Could Adversely Affect US GDP as Deficit Jumps to Highest Level in Six Months

By Naveen Athrappully

The U.S. trade deficit rose in April to widen to a six-month high, potentially affecting second-quarter GDP growth.

The trade deficit for April 2023 rose by $14 billion, to $74.6 billion, according to a June 7 news release from the Bureau of Economic Analysis (BEA). This is 23 percent rise from March’s $60.6 billion deficit and is the biggest monthly jump since 2015—pushing the trade deficit to a six-month high level. Exports for April were at $249 billion, down $9.2 billion from March. Meanwhile, imports registered a $4.8 billion growth, to $323.6 billion. Some experts believe the widening trade gap could end up negatively affecting GDP growth during the quarter.

“The terms of trade are worsening, and this will bring down second-quarter estimates of real GDP growth closer to the 1 percent stall speed, where bad things can happen and the economy can stumble and go over the cliff,” said Christopher Rupkey, chief economist at Fwdbonds, a financial resesearch company, in New York, according to Reuters.

To avoid GDP growth from getting affected, it would require imports to reverse course and slow down. However, this can be a tall task given that U.S. domestic demand continues to remain strong.

To make matters worse, American exports can get negatively impacted due to slowing global demand and a strengthening dollar.

Quarterly GDP growth rates have shown a declining trend over the past year. After being in the red for the first two quarters of 2022, GDP registered a positive growth of 3.2 percent in third quarter 2022. However, GDP growth then slowed down to 2.6 percent in fourth quarter 2022, and then to 1.3 percent in first quarter 2023.

Declining Exports, Rising Imports

Exports of crude oil, fuel oil, pharmaceutical preparations, gems and diamonds, financial services, government goods and services, and jewelry decreased in April, according to BEA data. Travel and other business services saw an increase.

When it came to imports, the influx of passenger cars, automotive parts and accessories, finished metal shapes, organic chemicals, cell phones and other household goods, and nonmonetary gold registered positive growth. The import of natural gas and crude oil fell.

The United States had the biggest trade surplus with the Netherlands at $4.2 billion, followed by South and Central America at $4.1 billion, Belgium at $1.9 billion, Hong Kong at $1.6 billion, and Australia at $1 billion.

The United States had the biggest trade deficit with China at $24.2 billion, followed by the European Union at $17.3 billion, Mexico at $13 billion, Vietnam at $8.5 billion, and Germany at $7.6 billion.

“A massive trade #deficit reflects US dependency on the world for virtually everything. But now, #globalization is contracting. Forget #metaverse headsets. Secular themes seem likely to focus on the rebuilding of the US capital stock,” Richard Bernstein Advisors stated in a tweet on June 8.

In stock investing, secular themes refer to factors like aging population, expansion of technology, and the growth of impact investing among others.

Dangers of Trade Deficits

America’s trade deficit rose in 2022 as well. According to data from the Department of Commerce, the trade deficit widened by $103 billion last year, moving up from $845 billion by the end of 2021 to $948.1 billion by the beginning of 2023.

Having a trade deficit can be disadvantageous to a country’s economy. In addition to potentially decreasing GDP growth, a consistent trade deficit can eventually lead to unemployment as the country is importing more than it exports.

For instance, if a country were to be pushed into a position whereby manufacturing phones domestically becomes expensive, the nation can end up importing them. This would mean that people employed in the mobile phone-manufacturing sector in the country would lose their jobs.

Trade deficits also pose deflationary risks, because a country in such a situation is essentially sending a portion of its currency to other nations. Deflation is a situation where lower demand pushes down prices. It can cause more unemployment and raise interest rates on debt.

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