Trade Deficit Analysis: May 2021
The US trade balance shows the deficit and surplus of US trade for imports and exports. A deficit occurs when imports are greater than exports. When the trade balance is in deficit, it accounts for one of the two components of the twin deficits. The fiscal deficit accounts for the other component and will be reviewed in a later article.
TTM = Trailing Twelve Months
Understanding the Trends
May 2021 saw a total trade deficit of -71.2B. It was up 3.14% over April but fell just shy of the record -75B trade deficit from March 2021. The plot below shows imports, exports, and net figures (lines) over the last 36 months. The impact of the COVID lockdowns can be seen in the dip in early 2020. The gross numbers are still below pre-pandemic levels, but the net numbers are hitting new all-time records.
Figure: 1 Monthly Plot Detail
Zooming out and focusing on the net numbers only shows the longer-term trend. This plot demonstrates just how much larger the goods deficit is compared to the services surplus. One item to note is that the services surplus has been declining since Jan 2018.
Figure: 2 Historical Net Trade Balance
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). This latest 12-month period of -787B is the largest ever, having just eclipsed the old record from September 2006 of -779B.
Figure: 3 Trailing 12 Months (TTM)
Although the net dollar deficits are hitting all-time records (March 2021 being the largest ever), it can be put in perspective by comparing the value to US GDP. As the chart below shows, the current records are still below the 2006 highs before the Great Financial Crisis.
Figure: 4 TTM vs GDP
Finally, to compare the calendar year with previous calendar years, the plot below shows the year-to-date (YTD) figures for each year through the current month.
Figure: 5 Year to Date
Digging into the numbers
Figure: 6 Trade Balance Summary
The latest month saw a total trade deficit of -71.2B which is 3.14% larger than April 2021 and nearly 30% larger than May 2020. May 2021 did not exceed the record -75B trade deficit from March 2021, but is the second-largest trade deficit in US history. On a TTM basis, the last 12-month period produced the largest dollar amount trade deficit of -787B representing a 38% increase compared to the TTM period ending May 2020. Relative to GDP, the -787B represents 3.5% of GDP. This value does not exceed the TTM trade deficits from the early 2000s that ranged from 4% – 5.5% of GDP (see GDP plot above).
It is important to note that the year-over-year comparisons are dramatically affected by the trade disruptions resulting from the COVID lockdowns.
Figure: 7 Trade Balance Detail
The detailed trade deficit table shows the components driving changes on a number of different measures. The massive YTD increase in goods both imported (22%) and exported (19%) can be directly attributed to the COVID lockdowns. This can be seen when comparing May 2020 and May 2021 showing a growth of 60% and 40% for exported goods and imported goods respectively.
One surprising figure to notice is the change in services. As the table below shows, services are rebounding for both imports and exports; however, the YoY growth is much faster in imports (-33.3 to -42.6 or 27%) vs exports (55.1 to 60.5 or 10%). The result has been a YTD increase in imported services but a decrease in exported services. Even though the US continues to run a trade surplus in services (+227B over TTM), the net figure has fallen by approximately 17.5% compared to the TTM as of May 2020. This declining balance in services can be seen across all measures except the most recent MoM period.
The deficit in goods outweighs the surplus in services by a factor of approximately 4 to 1. Regardless, it will be important to see if the shrinking services surplus trend reverses as the economy reopens.
What it means for Gold and Silver
The trade deficit matters for gold and silver because it shows how much the US is importing in exchange for US Dollars. A trade deficit means that the difference has to be made up with dollars rather than goods and services. Think about trading in a used vehicle for a new one. Because the old car is not as valuable as the new car, the customer must make up the difference with cash. The US exports are not as valuable as the imports coming into the US, thus the difference is made up by sending dollars abroad to trading partners.
Not only does this demonstrate a weak economy that consumes more than it produces, but it means the supply of dollars around the world continues to grow. With more dollars circulating internationally, it puts downward pressure on the US dollar exchange rate when compared to other currencies. As the dollar loses value in the global economy, it supports the price of commodities measured in dollars, specifically hard currency like gold and silver.
Data Source: https://fred.stlouisfed.org/series/BOPGSTB
Data Updated: Monthly on one month lag
Last Updated: Jul 02, 2021, for May 2021