Kiplinger Trade Outlook: The Trade Gap Widens Again

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The trade deficit is at its highest level since late 2022.
The U.S. trade deficit in goods and services rose to a seasonally adjusted $75.1 billion in May, from a downwardly revised $74.5 billion in April. The trade deficit is a measure of the difference between what the U.S. buys from foreign nations and what it sells overseas. The widening in the trade deficit from the previous month came despite both imports and exports falling slightly. The trade deficit has now widened in eight of the past nine months. A resilient U.S. economy and persistent dollar strength are contributing to a wider deficit this year.

Exports fell slightly in May, down 0.8% from the previous month. The decline in exports was driven by a large drop in industrial supplies, specifically petroleum products, fuel oil and gold. However, the decline was broad-based, with modest drops in autos, capital goods and food. Exports of services rose slightly, with travel exports — the spending by visitors to the United States — increasing 4.4% to a new record. Exports have contended with a weaker global economic backdrop and a stronger dollar, which makes U.S. goods relatively more expensive abroad.

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Imports are still up year-over-year, as domestic demand continues to normalize. Total imports fell 0.3% in May from the previous month, and while they are not booming, they’re still doing better than exports. Imports are up 6.2% from a year ago, while exports are up 4.3%. Most major categories of imports moved lower in May, but the weakness was concentrated in consumer goods and pharmaceuticals. And even consumer goods imports are still up 5% on a year-ago basis, while continued strong domestic demand remains supportive of growth. 

After rising for the first four months of the year, capital goods imports pulled back slightly. Industrial supplies imports bucked the trend in May, rising 2.6% amid a pop in crude oil imports. Imports of services rose to a new record of $67 billion. The trade surplus in services rose to $25.1 billion in May. 

Trade will weigh on GDP in the second quarter. May’s data indicate that net exports in the second quarter will be a drag on economic growth. After nearly two years of positive contributions to growth, trade has been a substantial headwind this year. This is primarily due to the continued strength in imports which subtract from net GDP gains. 

Source: Department of Commerce, Trade Data

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