Wednesday, April 27, 2022

Trade deficit, inventories, strong dollar should level inflation. But it isn't happening yet

Despite all the recent news about supply shortages, we got information today that indicates imports to the United States are at record levels.
The U.S. trade deficit in goods widened to a record high in March likely as businesses who are worried about shortages front-loaded imports after Russia's invasion of Ukraine, raising the risk that economic growth stalled in the first quarter.

The report from the Commerce Department on Wednesday also showed solid increases in retail and wholesale inventories. That could offset some of the hit to gross domestic product growth from the sky-high trade gap.

The goods trade deficit jumped 17.8% to an all-time high of $125.3 billion. The increase likely reflected both higher volumes and prices. Imports of goods accelerated 11.5% to $294.6 billion. They were boosted by a 15% surge in imports of industrial supplies, which include petroleum products.

Imports of consumer goods vaulted 13.6%, while those of motor vehicles increased 12.0%. There were also solid gains in imports of food and capital goods.
I’ll also note that increased imports and higher inventories should work to tamper down inflation, but that does not seem to have shown up in the CPI data so far.

The high level of imports also is illustrative of the US dollar zooming higher in recent months, which makes prodcuts from other countries cheaper for Americans to buy.

By the way, this is the exact OPPOSITE of what you’d see if our budget deficit was an economic problem and dollars were devalued.

That being said, the effect of supply backlogs from Europe and COVID-related shutdowns in China are likely to show up (or not show up) on shelves in the near future. And those increased inventories would likely decline soon enough, which could give the excuse to keep prices higher.

Another item to keep in mind is if our economy is so reliant on imports, it also leaves us susceptible to issues in other parts of the world that can screw up the supply chain and raise prices for consumers. And that takes away any advantage that might come from making things in other places, even if our dollar keeps strengthening. A positive sign with the high amount of imports is that it indicates that consumer demand stayed strong through the first 3 months of 2022, shrugging off higher prices so far. But it seems likely that something starts to give in Q2 - is it the higher prices, the higher inventories, the higher amount of imports, or the increased demand? And if it's not prices coming down, we are likely going to see growth slow from the booming rate we had at the end of 2021.

So maybe it's a good idea to encourage companies to make things in America and use local resources to reduce those uncertainties, and the Biden Administration has included a Buy America directive as part of the large infrastructure bill. Insourcing can also help keep demand moving along in this country by having the jobs (and wages) go into Americans' pockets, and back out to other businesses.

It could work, ya know. And the "inflationary/protectionist" argument isn't something that's going to fly when it's events in foreign countries that are causing the inflation is the first place. Because while our record trade deficit isn't a problem in itself (especially with the strong dollar), the overseas disruptions and related vulnerabilities to our economy that result are things we need to care about.

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