US trade deficit reaches nine-year high amid 'protectionist rhetoric'

The US trade deficit rose 5% in January to reach a nine-year high of $56.6bn but an improvement is expected in the coming months.

The increase in the overall deficit from January's print of $53.9bn was driven by a $3.8bn deterioration in the deficit on the oil balance, which rose to a 10-month high, and a fluke deterioration in the aircraft surplus which led to a 1.3% fall in total exports to $200.9bn.

For February, economists had penciled in a total shortfall on the country's foreign trade balance of $55.0bn.

Excluding those two sectors, the core deficit decreased by $2.8bn versus January, as exports of consumer goods reached a record high of $17.9bn.

In a research note released on Wednesday, Ian Shepherdson at Pantheon Macroeconomics said: "the January shifts in the oil and aircraft balances will reverse, so the headline trade numbers are going to look much better over the next few months. Net trade might still make a modest positive contribution to Q1 GDP growth, despite the January data."

Backing up his reasoning, Shepherdson pointed out how the trend in US oil production was clearly higher, while the boost to import demand from the hurricanes last fall would soon begin to reverse.

To take note of, the goods trade deficit with China, a key bugbear for the White House, surged 16.7% year-on-year to $35.5bn amid a 2.9% increase in imports, to reach its widest level since September 2015.

America's second largest bilateral deficit in January was with the European Union, with the red ink on that front reaching $15bn last month, which was $2.1bn less than in January.

The January deficit on trade in goods with China was roughly -$34bn.

In the background, investors were closely monitoring the US and EU's tit-for-tat squabble over trade tariffs that was instigated by Washington's last week, with the EU trade commissioner Cecilia Malmstrom setting out plans for higher import duties on bourbon, peanut butter, steel, industrial products and more.

Indeed, the bitter disagreement between the two parties may be far from over, for as Michael Pearce, senior economist at Capital Economics said, if the trade date doesn't bounce back the January figures suggest "net trade will once again be a drag on economic growth in the first quarter, and will only add fuel President Donald Trump’s protectionist rhetoric in recent weeks."

Nonetheless, Pearce expected the near 10% depreciation in the Greenback over the previous year to boost exports, helping to limit any drag on growth from the trade deficit.

"Admittedly, survey measures point to growth in imports also picking up further. But even so, a small drag from net trade should not prevent economic growth from accelerating to 2.8% this year."