The trade deficit is the difference between what we export out of the U.S. versus what we import into the U.S. from other countries. Why is this important? Well, it is part and parcel to the calculation of Gross Domestic Product or the level of economic growth, or not, in the United States.
GDP = Consumption + Private Investment + Government Spending + (Exports – Imports)
The more that we import is a drag on the calculation of GDP and the more we export is an addition to GDP. I know, this can be a little confusing, however, here is the important point, even though imports declined on a month-over-month basis by 1.5% which is a postive for the GDP number, exports, which is what we make here and ship out, ALSO declined by 1.5%, so it was a wash, right?
Wrong. This report tells us two very important things. While food and energy prices are consuming more than 22% of the salary and wages of individuals – consumers are demanding less which is why we are importing less. Consumption is 70% of GDP so this is no small matter. Secondly, with Japan, who is one of the U.S.’s largest trading partners in the tank for time being, this is crimping demand for our exports overseas – which is not good for U.S. manufacturers and growth of revenues going forward.
Net, net, there was very little good news in the trade deficit report today. Pay attention to earnings season as we progress – company reports will tell us a lot about what the future is looking like.