Analysis - US Trade Deficit Data for October 2021

Analysis - US Trade Deficit Data for October 2021

By Megha

The US trade deficit fell sharply in October as exports increased to a record high. This has set up a trade to contribute to the economy's growth this quarter for the first time in more than twelve months. The report from the Commerce Department came earlier this month. It also showed the imports increasing to an all-time high. It added to a narrowing labor market, robust buyer spending, and manufacturing and services activity that shows that economic growth has started as the year ends. The trade gap declined by more than seventeen percent to a low of half-an-year of $67.1 billion. This was the highest percentage decline in more than six years. This shows a growth in the flow of service and goods after the disruption caused by the coronavirus pandemic. Experts had forecasted a deficit of $66.8 billion.


The exports have increased by 8.1% to a high of $223.6 billion. The increase was led by goods exports. It increased by 11.1% to $158.7 billion. This was also a record high. The exports of industrial materials and supplies grew by $6.4 billion. The shipments of crude oil grew by $1.2 billion. The petroleum exports were the biggest on record. The capital goods exports grew by $3.1 billion. It was boosted by other civilian aircraft and industrial machines. The food exports increased by $2.1 billion. The soybeans grew by $1.8 billion. The exports of user goods increased by $1.6 billion. It was boosted by growth in shipments of motor vehicles, engines, parts, and gem diamonds. The country exported more services, increasing to $64.9 billion. This shows an increase in overseas travel, use of other business services, and charges for the utilization of intellectual property.


Further growth will happen after the country reopens its boundaries to international travelers after a ban of nearly two years. However, the Omicron variant of the pandemic could slow down international travel after recent restrictions on tourists from Southern African nations. US financial markets were not much affected by the US trade deficit data. Chief economist at FWDBONDS Christopher Rupkey said, "The trade deficit is narrowing big time and pouring even more fuel into the economy's tank, which guarantees stronger growth as 2021 comes to an end. The brightening trade picture is additional evidence that the economy is very strong." Citigroup economist Veronica Clark said, "While international travel activity could be dampened again later in the month with the emergence of the Omicron variant, we expect a continued normalization of travel through 2022."


The US trade deficit data show robust import


The increase in exports eclipsed a growth of 0.9% in imports to $290.7 billion. This was also a record high. The goods imports increased by 0.7% to an all-time increase of $242.7 billion. The increase was led by motor vehicles, engines, and parts, which grew by $1.5 billion. There were also increases in imports of consumer goods. This included cell phones and household goods. The imports of industrial materials and supplies declined, as did the imports of capital goods. They were pulled down by decreases in civilian aircraft and semiconductors. There is currently a chip shortage all around the globe. Adjusted for inflation, the goods deficit declined by $13.5 billion to $97.6 billion in the previous month. This was the tiniest so-called real goods deficit since the previous year. If the real goods trade deficit continues to decline, the trade could contribute to the GDP this quarter.


The trade gap has been a significant drag on GDP growth for more than four consecutive quarters. The fourth-quarter GDP growth estimates are quite high at an 8.6% annualized rate. The economy increased at a pace of 2.1% in the third quarter. After being limited by shortages and a new flare-up of coronavirus infections driven by the Delta wave, it is getting its speed back. The shortages happened because of congested supply chains because of the coronavirus. This is causing price pressures on the economy. There are some indications that inflation could stay well above the 2% target of the Federal Reserve for some time. This is also when firms raise wages in the competition to get workers.


Another report from the Labor Department showed that the unit labor costs, which is the price of labor per single unit of output, increased more than what was expected in the third quarter. The labor cost increased at an annualized rate of 9.6% last quarter. This was revised up from the 8.3% growth reported in the previous month. The unit labor costs grew at 6.3% compared to a year ago. This was the biggest growth in the past forty years. The unemployment rate is at a low of more than twenty months at 4.2%. JPMorgan economist Daniel Silver said, "Early in the fourth quarter, it looks like net exports are on track to add to GDP growth although the recent volatility in the monthly figures makes it hard to detect any underlying trend." We continue to see upside risk to our 7.0% real GDP growth forecast for the fourth quarter." Brean Capital's senior economic advisor Conrad DeQaudros said, "Unit wage cost pressures are strong in the face of a tight labor market."


US trade deficit data indicates that labor costs have increased


The US unit labor costs increased more than initially predicted in the third quarter. This showed that inflation could remain a little high for some time to come. The labor costs increased a speed of 5.9% in the quarter of April to June. They grew at a rate of 6.3% compared to twelve months ago. This was instead of the previously reported rate of 4.8%. The experts had forecasted that the unit labor costs would increase at 8.3%. The pandemic-related shortages amidst the narrow supply chain had increased the inflation above the target of the Federal Reserve. The wages are also increasing because the firms are looking for workers. The hourly compensation grew by 3.9% in the third quarter. This was more than the 2.9% rate that was reported previously.


The increase in labor costs came at the expense of workers' productivity. It declined at a downwardly revised rate of 5.2% in the last quarter. The productivity was previously reported to have declined at a pace of 5.0%. It increased at a speed of 2.4% in the quarter of April-June. Compared to the third quarter of the previous year, productivity declined at a rate of 0.6%. It was also reported to have decreased at a rate of 0.5%. The hours worked grew at 7.4% in the previous quarter. This was revised up from the estimated rate of seven percent.


The US trade deficit data shows that the unemployment rate has gone down


The previous month, the US employment rise slowed greatly due to job losses in the local government, education, and retailers. But the unemployment decreased to a low of 4.2%. This shows that the labor market is tightening rapidly. The points of four-tenths-of-a-percentage drop in the jobless rate from the report of October by the Labor Department in the employment report happened even as 594,000 new workers entered the labor force. This was the highest in the past twelve months. The workers also put in more hours. This increased the aggregate wages, which should assist in underpinning consumer spending.


"Don't be fooled by the measly payroll jobs gain this month because the economy's engines are actually in overdrive as shown by the plunge in joblessness," said Christopher Rupkey, chief economist at FWDBONDS in New York. "But I also know that despite this progress, families are anxious about COVID. They're anxious about the cost of living, the economy more broadly," Biden said in a speech about the economy. "I want you to know I hear you. It is not enough to know that we're making progress."



Experts say that the economy is quite close to maximum employment. This makes an early interest rate increase from the Federal Reserve very likely. Let us see what the future holds.



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