US trade deficit widens: Is it good news for the economy?
While economists widely agree that a stronger dollar is causing the trade deficit to grow, they do not all agree on whether that's good news for the economy.
America is buying more than it’s selling, and its trade deficit is growing larger as a result.
On Wednesday, the US Commerce Department revealed that the trade gap had grown by 7.1 percent in June to 43.8 million, the largest in three months. The figure was significantly higher than the 42.8 billion that analysts had predicted previously. But while economists widely concur that a stronger dollar is causing the trade deficit to grow by making exports more expensive and spurring demand for cheaper imports, they do not all agree on whether a strong dollar and a wider trade deficit are good news for the US economy.
“In the U.S. it [a large trade deficit] can signal economic health: that American consumers and businesses are saving money by buying cheaper foreign goods, and that the U.S. economy is attracting overseas investment, which drives productivity and demand for domestic and imported goods,” the Wall Street Journal reported in June.
“That’s why the U.S. trade deficit, which was about $41 billion in April, generally expands during periods of economic growth, when Americans can demand more goods from the global market and attract more foreign investment. During economic slowdowns the deficit shrinks, as after the 2008 financial crisis. It even turned into a surplus during the 1990-1991 recession and the Great Depression,” it continued.
And after the FED’s announcement that it plans to raise interest rates very soon, few would argue that the US economy is not growing healthier.
Still, some economists are painting a less rosy picture of what a growing trade deficit means for the US economy, saying that it could represent an obstacle to further economic growth.
“A firm dollar, which makes American goods relatively more expensive, and weak demand overseas are weighing on manufacturers and preventing the world’s largest economy from gaining momentum,” reported Michelle Jamrisko for Bloomberg Business.
And following the release of Commerce Department data on Wednesday, Josh Mitchell wrote for the Wall Street Journal:
“U.S. economic growth could be held back in coming months if the trend continues. It’s one reason many economists don’t expect U.S. economic growth in the summer and fall to pick up much from the 2.3% annualized expansion the economy registered in the second quarter.”
Some analysts say that big corporations should be worried about the dollar’s strength and what it will mean for their profitability.
“Each of the five major dips in U.S. corporate profitability since 1970 have occurred following reduced sales after periods of relative dollar strength,” wrote Rana Foroohar for Time in April.
Since June 2014, the dollar has gained 15 percent against the currencies of the country’s main trading partners, making imports significantly cheaper.
Meanwhile, exports, which helped revive the US economy as it slunk out of recession, have dropped by around 3 percent since last year. This is largely due to the economic difficulties faced by Europe and moderate growth in China compared to recent years. Exports to the European Union fell 2.3 percent in June.
Conversely, during the second quarter of 2015, domestic demand grew steadily.
Specifically, imports from the European Union increased by 4.0 percent in June, bringing the trade deficit with the EU to an all-time high. The trade gap with Mexico was also at its highest level since May 2012.
In June, overall imports increased by 1.2 percent to $232.4 billion, while exports dropped 0.1 percent to $188.6 billion. Food and automobile imports were the highest on record that month.
Nevertheless, some analysts claim that the June numbers could be somewhat distorted due to a labor strike that closed ports across the West Coast during the winter.
"Exports remain far below trend and we have yet to see a decisive rebound following the resolution of the West Coast port strike,” Laura Rosner, an economist at BNP Paribas, told the BBC.