Surging Trade Deficit Likely to Reverse in the Months Ahead

The Trade Deficit is one of the two components of the twin deficits; the other being the federal budget deficit which was last reviewed in January. The trade deficit used to be a number that received a ton of attention in the 1980s and 1990s because it was determined to be a strong gauge of the strength and weakness in the US economy. It was last positive in 1975, but big moves in the trade deficit through the 80s and 90s could impact the stock market.

Lately, not many people focus on the trade deficit numbers; however, it is still an excellent metric for identifying how the US is performing. How much more are we consuming than we are producing? It also allows us to export our inflation abroad. If the rest of the world decides to stop making things for us, then it could be an ugly transition.

Current Trends

The February trade deficit came in at -$123B which was the second largest on record only behind the January trade deficit of -$131B. This surge is driven by people trying to get products into the US before tariffs are enacted.

Once the tariffs go into effect, we are likely to see a big contraction in the trade deficit. Not only have we made advance purchases on goods with the recent surge, but the tariffs will make foreign goods more expensive, denting demand.

Figure: 1 Monthly Plot Detail

The table below provides detail and shows the massive surge in imports YoY. The TTM total deficit has surged 25%!

Figure: 2 Trade Balance Detail

Historical Perspective

Zooming out and focusing on the net numbers shows the longer-term trend. It really puts the last two months into perspective. It is unlikely this continues and we will probably see a reversal back to the old trend line or even above it as tariffs put a dent in trade.

Figure: 3 Historical Net Trade Balance

The Services Surplus has been drifting lower ever since the election as well.

Figure: 4 Historical Services Surplus

To put it all together and remove some of the noise, the next plot below shows the Trailing Twelve Month (TTM) values for each month (i.e., each period represents the summation of the previous 12-months). The dip can be seen from the last two months on the far right.

Figure: 5 Trailing 12 Months (TTM)

The TTM Net Trade Deficit surge has brought the deficit as a % of GDP to 3.48%. This is still well below the Covid years and pre-financial crisis.

Figure: 6 TTM vs GDP

The chart below shows the YTD values. While Exports are mostly flat, the Imports have seen a big surge.

Figure: 7 Year to Date

Wrapping Up

The Trade Deficit still gets very little attention, but it serves as a huge windfall and potential risk for the US. Currently, foreign countries are willing to provide goods and services in exchange for USD that far exceeds what they are buying with the USD they earn.

Trump is playing with fire by targeting our trade partners. If we see Imports start to slow dramatically in the months ahead, it could result in a big spike in prices. The huge deficit surges these last two months are anomalies.