Rising U.S. Trade Deficit in May
At the same time with the NFP release, the US Trade Balance for May 2020 revealed a rising trade deficit – $54.6 billion in May when compared with 49.8 billion the previous month. In a way, the release confirmed the expectations that the deficit will widen in May, but the forecast was for $53 billion.
The Trade Balance, while listed as a third-tier data in terms of its importance on the economic calendar, offers tremendous information to traders willing to dig into the fundamentals of an economy. In this case, the trade deficit widened for the third month in a row, while the three-month moving average also increased.
Details of the US International Trade in Goods and Services DeficitCopy link to section
In short, both exports and imports declined. Since the decline in exports (-4.4%) exceeded the decline in imports (-0.9%), the deficit grew +9.7% for the month of May.
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The Trade Balance is released monthly, more than a month (around 35 days) after the previous month ends. It reflects the domestic currency demand (in this case, the USD) in relation to the export demand – to pay for exported goods out of the United States, one must use the USD. Hence, higher exports are good for a currency, and vice versa.
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In this case, the slowdown in exports points to a bleak picture for the USD, if we solely use this metric. If we consider that export demand also impacts prices at the manufacturing level, it shows further downside pressure on inflation and inflation expectations – another clue that the Fed is right in its forward guidance that signals accommodative monetary policy for years ahead.
For those interested in further details, the trade balance actually showed a surplus with a few countries (e.g., Brazil, countries from Central America, United Kingdom). However, the bulk of the trade recorded a deficit with main partners like the European Union, Japan, Canada, or Saudi Arabia.
All in all, it is not a surprising print for the Trade Balance indicator and doesn’t signal a shift in the overall trade policy of the United States. Considering the ongoing US-China trade negotiations over the past couple of years and the way the United States negotiated deals with all its important partners, Trade Balance remains an indicator to watch moving forward, especially considering the upcoming US Presidential elections in November.