Trade Balance Improves Explosively in October—Signal or Noise?

Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

The US balance on foreign trade improved dramatically in October, to a deficit of -$67.1 billion, from -$81.4 billion in September, as exports rose 8.1% versus a 0.9% rise in imports. Export gains were recorded for most types of goods, with especially sharp gains for industrial supplies, mostly oil, and food, mostly soybeans. In terms of geographic areas, far and away the largest export increases were in trade with Canada, China and Hong Kong.

When advance measures of these data were announced last week, along with data on consumer spending, many Wall Street houses took the trade data as a sign of sustainable improvements in foreign trade, and they consequently marked their GDP forecasts higher, to the 7% to 9% range for 4Q. We are inclined to be more circumspect concerning the gains.

As impressive as the October export gains appear, they were to a great extent a reversal of export weakness in September. So, average together the September and October data, and you get an uptrend in exports, but not nearly as explosive a one as the October data would suggest. Similarly, the big increases in oil and food exports—and in exports to China and Hong Kong—work to offset sharp declines in preceding months, suggesting a short-term export rebound rather than a durable growth trend.

The accompanying chart provides some perspective on things. The foreign trade data obviously contain a lot of “moving parts,” components such as oil, food and motor vehicles that show a lot of fluctuation/ volatility from month to month. The trade deficit measures including these components show sharp October improvement following a similarly sharp deterioration in September. Abstract from these volatile components, as per the heavier blue line, and the “underlying” trade balance shows a steadily declining trend, some improvement in October, but nothing out of the range of random fluctuations seen in preceding months.

US Foreign Trade Balance, Annualized Seasonally. Adjusted Trade Balances

Meanwhile, we have not even tried to fold in the disruptive effects on trade flows of the container ship traffic jam bedeviling Southern California seaports.

Bottom line: Perhaps the October data do indeed mark a break in trend that will lead to a constant boost to growth from the export side. However, our inclination is to think that the October gains were somewhat spurious and that going forward, foreign trade will remain the constant drag on US growth that it has been throughout recent years.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").

Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.

These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.

Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.

Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.

Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.

These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.

Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.