Trade Deficit Shrinks as Imports Drop Almost 2% and Exports Hit New Record High

The trade deficit in April unexpectedly came in $5 billion below expectations, at $58.5B (consensus $63.5B), and $4 billion below the prior month. In addition, March's deficit was reduced by $1.5 billion to $62.4 Billion. Recall that the deficit in March had risen by $4.8 billion from the prior month, so some view the improvement in April as simply a return back to the narrowing trend of the past year. April's improvement was gained by a combination of falling imports and a record high level of exports.

Exports rose +.2% MoM to $129.5 billion on demand for food and consumer goods. Food exports rose 12% MoM in April, while computer, semiconductors, and telecom equipment saw the largest declines. The improvement in the trend of the U.S. trade deficit is being helped by strength in global economic growth, and a slow weakening of the dollar.

April's report does raise concerns about domestic retail spending. Imports fell -1.9% MoM to $191.6 billion. Most of the drop in imports was in consumer goods and vehicles, but the softening demand was relatively broad-based as capital goods also declined. Oil imports held steady, as rising prices (highest since last September) were offset by a decline in volume. Oil volumes have risen in six of the last eight weeks, as oil prices have risen, so energy imports will probably rise for May and June. Excluding petroleum, the trade deficit narrowed by $3.8 billion. Pharmaceutical imports, which have been very volatile lately, fell by -17% MoM, and statistically accounted for a large part of decline in imports in April.

Breaking down by goods versus services, the U.S. imports $67 billion more in goods than it exports. In services, the U.S. exports $8.5 billion more than it imports.

For figuring GDP impact, the government adjusts the nominal deficit figure for changes in prices. This adjustment brings the April trade deficit down to $54.9 billion, the lowest level in almost three years. Economists are revising estimates for second quarter GDP higher by +.3-.5%. Revisions to March data will slightly raise first quarter GDP.

Regionally, the trade gap with China widened to $19.4 billion for April, the largest monthly deficit since January. Year-to-date, the trade deficit with China has grown 19% versus the same period last year. The trade deficit with China has grown steadily for the last five years, as the reason for the rising protectionist sentiment in the U.S. government.