The US merchandise foreign trade deficit declined slightly in February in both nominal and real terms, as import volumes declined a bit more than export volumes. Even with the declines, however, import volumes remained relatively high for the third straight month, resulting in a comparably high trade deficit, as you can see in the accompanying chart.
Assuming March data come in roughly in line with what we have seen for January and February, the trade deficit will bulge enough in 1Q to subtract about 2 percentage points from GDP growth. The upside of this “deterioration” is that the recent surge in imports is working to restore merchant inventories and ease pricing pressures for retailers. That is, the surge in imports is working to relieve the supply pipeline pressures that have understandably received so much attention.
As the chart suggests, exports have not been uncommonly weak recently. Rather, they have generally shown a decent increasing trend over the last year plus, and even with the slight declines of the last two months, they are holding at levels comparable to what we saw prior to the onset of the pandemic.
Rather, the “uncommon” development is the spurt in imports, which have been rising for the past 18 months and hit especially high levels over the last three months. The import gains of late-2020 and early-2021 accompanied even sharper increases in domestic consumer spending on merchandise, and the fact that such consumer spending grew even faster than imports is what drove the supply and price pressures of recent months.
However, again, these conditions have been easing recently. As we have mentioned on a number of occasions, consumer spending on merchandise has been flat since March 2021, with even some decline since November. Meanwhile, imports have stepped up substantially over those same three months.
The effects of this combination can be seen in merchant inventories. Real inventories grew at a rate of nearly $200 billion per year in 4Q, after having declined in each of the three preceding quarters. Much or most of that 4Q inventory gain occurred in December, when imports first bulged noticeably. And with imports remaining relatively high in January and February opposite still-restrained goods consumption, inventory accumulation has continued this quarter.
The 1Q pace of real inventory growth is not quite as fast as that of 4Q. So on top of a drag from foreign trade, inventories will also be a drag on 1Q growth. However, again, the restoration of inventories to more normal levels for merchants is easing price pressures. The rate of increase in the core CPI for goods prices was “only” 0.4% in February, down from 1.0% or so gains in each of the four preceding months.
As always, one month does not a trend make. However, with the inventory situation clearly easing and goods demand still flat at best in recent months, there is reason to think that goods price increases will have moderated even further in March and after.