US: Trade gap narrows to the smallest deficit in six months – Wells Fargo

The US trade gap narrowed to the smallest deficit in six months as export growth outpaced imports for the second consecutive month, point out analysts at Wells Fargo. They see that the tide is turning on domestic demand, which should continue to quell import growth from the breakneck pace that took place throughout the pandemic.

Key Quotes: 

“As domestic demand for goods continues to roll over, however, overall import growth should continue to cool. Total goods imports remain a whopping 42% above pre-pandemic February 2020 levels as of May (chart). The need to restock inventory and obtain seasonal product ahead of the holiday season will keep imports rolling in, but we expect import growth to cool from the breakneck pace seen throughout the pandemic which helped meet rapid demand for consumer goods.”

“Crude oil represented the largest dollar gain of both exports (+$1.1 billion) and imports (+$950 million) in May, but as with most economic data today, we must consider these gains in the context of higher prices.”

“More broadly, the real U.S. goods trade deficit widened to $116.6 billion in May. After adjusting for higher prices, both real goods exports and imports declined, but exports did so at a faster rate, slipping 1.3% compared to the 0.7% drop in real goods imports. Still, the trade data for April and May positions net exports to provide a sizable positive contribution to headline growth in the second quarter, likely somewhere around a 1.0 percentage point contribution to top-line.”

“With domestic demand having outpaced demand in many of America's major trading partners throughout the pandemic, Q2 will mark the first time in seven quarters trade has positively contributed to headline growth.”