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Trade in services leads to narrower deficit

Data released this week in a new Wells Fargo report showed that the U.S. trade deficit in goods and services narrowed by $4.1 billion in September to a 19-month low of $36.4 billion. Preliminary data on international trade in goods that was released last week had suggested that the deficit would fall by only $3.1 billion.

The larger-than-expected decline in the September trade deficit was due to an increase in the surplus in trade in services. As Wells Fargo economists have written in previous reports, exports have been boosted in the past few months by a on-off surge in soybean exports. A poor harvest in South America this year allowed American exporters of soybeans to fill the gap.

Following the surge over the summer, soybean exports declined by $2 billion in September. Despite this drop in soybean exports, overall exports of goods rose by more than $600 million in September. Areas of strength included capital goods exports, which were boosted by a $1.4 billion increase in exports of civilian aircraft, and consumer goods exports, which rose by $738 million during the month.

On the other side of the ledger, imports of goods fell by $2 billion. The value of petroleum imports was essentially flat on the month, but there was notable weakness in capital goods imports and in consumer goods imports. The decline in capital goods imports is consistent with the weakness in business fixed investment spending in recent quarters. Given that personal consumption expenditures continue to grow, Wells Fargo economists view the $837 million decline in consumer goods imports in September as being somewhat of an aberration.

The initial estimate of third quarter GDP growth that the Bureau of Economic Analysis (BEA) released last week showed that real exports of goods and services shot up at an annualized rate of 10 percent while real imports were up only 2.3 percent. Indeed, real net exports of goods and services boosted real GDP growth by 0.8 percentage points in Q3, the largest positive quarterly contribution to overall GDP growth in nearly three years. Although the trade surplus in services rose in September, the BEA revised trade deficits in goods in previous months a bit higher in this monthly release. Therefore, there should not be meaningful changes to the positive net export contribution to Q3 GDP growth when BEA releases revised estimates in coming weeks.

Looking forward, economists expect that net exports will again exert headwinds overall GDP growth. The one-off surge in soybean exports will not be repeated in coming quarters, and growth in many of America’s major trading partners remains lackluster. On the other side of the ledger, continued modest growth in domestic demand likely will cause import growth to accelerate somewhat.

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