Matthew D. from Kingsville, TX asks: Hello Mitch, I’m writing to hear your thoughts on the U.S.’s record trade deficit. It seems like the country/economy is going in the opposite direction as we should be. Wouldn’t it be better if we were selling more than we’re buying? Do you think this could affect the markets this year?
Mitch’s Response:
Thank you for your email. For readers who may not know the context of your question, allow me to explain.
Last week, the U.S. Commerce Department reported that the U.S. trade deficit increased a stout 27% last year to an all-time high of $859.1 billion. A trade deficit happens when a country imports more goods and services than they export, which in the U.S.’s case is approaching $1 trillion.1
Breaking down the trade deficit number indeed underscores the dependence of U.S. consumer and businesses on imports from other countries, and in particular China. American consumers spent heavily last year on computers, furniture, and other goods while spending less on services like travel, restaurants, and hotels. Businesses also had strong demand for capital goods and spending on food and energy rose based on demand and higher prices.
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Overall, the 2021 trade deficit blew past the previous record of $763.53 set in 2006, and the trade deficit between the U.S. and China grew 14.5% to $355.3 billion. The trade deficit with China, while large, did not set a record, however – that was for $418.2 billion in 2018.
I realize that trade deficits seem bad on the surface – a country is buying more than it is selling. But what matters more than deficits is whether total trade is increasing. In other words, the U.S. may be buying more than it is selling, but if the consumers and businesses are buying more and selling more than that points to higher overall economic activity – a positive.
Indeed, both exports and imports are on the rise, which underscores the strength of the U.S. economy. If exports were plummeting while imports were rising rapidly – and total trade fell – that may be a cause for concern. But that’s not what is happening now.
I also think we could see some softening in the deficit later this year, as U.S. consumers continue to shift purchases from goods to services. In the 2021 trade figures, service exports were still at fairly depressed levels, as the pandemic’s twists and turns ultimately led to fewer vacations, travel, tourist visits, etc. It’s worth noting here too that the U.S. still ran a services surplus even with these lower levels of activity, of $231.5 billion. That’s down approximately 5% from the previous year, a trend I could see reversing in 2022.
The bottom line is that it is important to think less about deficits and surpluses and more about total trade. Doing so will give you a better read on the U.S.’s and global economy’s health.
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