The U.S. trade gap widened in January with a steep drop in exports, a reflection of a strong dollar and a weakened global economy.
Entering 2016, the U.S. trade deficit grew to $45.7 billion with a gap increase of $1 billion from December. Exports slumped significantly by $3.8 billion to $176.5 billion in January. Imports fell $2.8 billion to a low of $222.1 billion and the import of consumer goods, which saw a peak of $51.7 billion in October, fell in January by $0.8 billion to $47.9 billion.
A strong dollar means that American goods and services are more costly to other countries, so a decrease in U.S. exports in January makes sense, but a strong dollar should also mean an increase of imports given the strength of the dollar. However U.S. imports of goods and services reached an all-time low that hasn’t occurred since March 2013 when it dipped to 221.3 billion.
The U.S. international trade deficit dropped in January from a combination of low imports and sluggish exports because of a strong dollar and the unattractiveness of U.S. imports to other countries.
The trade deficit in January with major trade partners China and Mexico increased by $1.4 billion and $0.8 billion, respectively. China is in the midst of an economic slowdown as its currency keeps losing value. The country devalued its currency in January to a rate of 6.56 yuan to the dollar.
A decline in U.S. exports is expected to continue.
“We expect this drag to last for the course of this year and likely into next year based on the lag effects of exchange rate and depreciation,” said Brittany Baumann, an economist at Credit Agricole. As the American dollar grows stronger, other currencies have depreciated or reduced in value, contributing to a slowing demand of U.S. imports.
Among more than 100 economists, Baumann most closely predicted the January trade deficit at $45.3 billion.
Today’s U.S. Census report on international trade showed a reduction in imports of consumer goods in January. A strong dollar and strong economy should lead to higher imports so the decline is surprising.
“It could be more reflective of slower global growth elsewhere and that foreign economies are exporting less,” Baumann said.
Last year, the import of consumer goods, which has been falling since October, had an all-time peak at $54.1 billion in March and a low of $45.2 billion in February.
Gregory Daco, head of U.S. Macroeconomics at Oxford Economics Limited, predicted a more optimistic trade deficit of $44 billion, which was in line with most economists’ expectations for January.
Daco is unconcerned by a lack of growth in the U.S. import of consumer goods.
“Businesses in consumer sectors are going to be very watchful of not over-importing,” Daco said.
He expects a moderate upward trend of imports of consumer goods because of a healthy domestic demand for goods at low prices.
“The U.S. dollar will continue to rise reflective of the U.S. economy outpacing its peers and likely tightening later this year when most central banks are loosening monetary conditions,” Daco said.
As the dollar grows stronger, exports from the U.S. will remain uncompetitive in the global market. Baumann predicts that the value of the dollar will peak by the end of the year.