Weekly Economic Trends and Indicators

The Headline:

According to the Census Bureau and the Bureau of Economic Analysis, the U.S. trade deficit decreased from $68.3 billion in May to $65.5 billion in June. This represents a decrease of about 4.1%. Exports were roughly unchanged in June at $247.5 billion while imports decreased by about 1% from $316.1 billion in May to $313.0 billion in June.

The trade deficit for the first six months of 2023 was about $409 billion, which is down from $526 billion in the first half of 2022.

The Details:

Exports of industrial supplies and materials decreased by $0.7 billion led by declines in crude oil exports. Exports of consumer goods decreased by $0.4 billion. Exports of capital goods increased by $0.8 billion despite a decrease in exports of civilian aircraft of $0.8 billion. The rest of the category increased by $1.6 billion to make up the difference.

Imports of capital goods decreased by $2.3 billion with most of that accounted for by a $1.6 billion decrease in computer imports. Imports of industrial supplies and materials decreased by $2.2 billion. Increases in imports were led by automotive vehicles, parts, and engines (up $1.3 billion) and consumer goods (up $0.4 billion).

The Context:

The decrease in both exports and imports of industrial supplies (including crude oil) and the decrease in imports of capital goods speaks to a general softening of economic activity both at home and abroad. If the U.S. can avoid a recession while the world economy slows, this could increase the trade deficit as imports keep expanding faster than exports.

Whether or not the U.S. can avoid a recession as well as where interest rates eventually peak will also greatly influence the value of the dollar. The higher U.S. interest rates rise relative to the rest of the world’s rates, the quicker our inflation comes down, and the more attractive U.S. investments are to the world. This increases the value of the dollar and makes our products more expensive. The reverse is also true. This relationship is especially critical for export manufacturers, which are well-represented regionally and locally. The best-case scenario for the sector would be for the dollar to continue to decline from its 2022 peak. The flip side of that coin is that a dollar decline would keep import prices higher, which harms domestic consumers.

The broad dollar index is up roughly 30% from a decade ago. While this has been a boon to consumers and while we have been recession free (with the brief exception of COVID-19) for all this time, this has also been a severe headwind facing export manufacturers. A respite from interest rate hikes at home would be welcome relief. Even so, the strength of the U.S. economy relative to the rest of the world is likely to continue to provide support for the dollar, at least until the next recession, whenever that may be.

Next week: Local labor market update