A narrowing in the trade deficit in back-to-back months means good things for Q2 GDP, but this report is not yet capturing the extent of the steel and aluminum tariffs and survey data about trade is signaling a warning.
Trade Poised to Boost Second Quarter GDP
As the second quarter began, the U.S. trade deficit narrowed as exports increased 0.3 percent while imports declined 0.2 percent in April. After having widened for six consecutive months and now having narrowed in back-to-back months, trade is positioned to be additive to GDP in the second quarter, perhaps substantially so.
Our latest forecast published earlier today (prior to this morning’s trade report) looks for trade to add seven tenths of a percentage point to headline GDP in the second quarter. If that is indeed the contribution from net exports, it would mark the biggest quarterly boost to GDP from trade in more than four years.
Given the preoccupation that financial markets have had with tariffs and the potential for a broader trade war, might the flattering trade numbers be a salve for worried markets that there is nothing to fear in protectionist trade policies? Not so fast, keep in mind that this data is only through April and the broader extension of tariffs to our NAFTA trading partners and Europe was not effective until June. So the only impact observable for those countries in today’s report (and next month’s as well) would be to the extent that those countries scaled back in anticipation of eventual tariffs.
It is also useful to remember that international trade figures evolve with long lead times and a glacial pace. It takes a long time to build trust, relationships and global payment infrastructure between trading partners, and it remains to be seen if those bonds can be broken down more quickly. On that basis, it is unclear how long the shadow of tariffs will be cast on trade dynamics in coming years.
Steel and Aluminum Imports
If there is a storm coming, this might be the calm before it. Imports of iron and steel mill products increased $228 million in April alone and have increased more in the first four months of 2018 than they did in the same period of 2017. Meanwhile imports of bauxite and aluminum increased $44 million in the month. In the first four months of the year, the United States has imported better than half a billion dollars (or roughly 20 percent) more in bauxite and aluminum products than it did during the same period in 2017.
Softening in the Soft Data
U.S. manufacturers still report expansion in both exports and imports, but not to as broad an extent as they were just a few months ago. In the past three months, the ISM imports component has slipped 6.4 points, the largest slowing over a 3-month period since 2014, and the ISM exports component has come down 7.2 points, the biggest 3-month slowdown for this series since 2012.