U.S. trade deficit narrows sharply as transitory effects wane

The U.S. international trade deficit narrowed substantially from a downwardly revised $50.6bn in March to $40.9bn in April - much smaller than the $44bn figure anticipated by economists. Exports rose by 1.0% m/m in April, led by capital goods (+4.6%), industrial supplies (+1.8%) and automotive shipments (+1.3%). Services exports, on the other hand, were flat.

"The report largely confirmed our suspicions that the outsized March deficit was due to transitory factors related to West Coast port disruptions. As such, the April pullback in imports was a largely expected relief." - said TD Economics

Aside from the transitory factors impacting the monthly data, trend import growth has been quite strong given the higher purchasing power of the U.S. dollar and a growing economy. While the greenback has pared some previous gains lately, the overall strength in imports is likely to persist given the improving U.S. economy.

At the same time, while it is encouraging to see that U.S. exports appear to have turned the corner after a horrendous start to the year, the lofty dollar and lukewarm global demand will continue to hinder them over the medium term. Some reprieve could come should global growth accelerate more robustly given the substantial monetary policy accommodation that global central banks are deploying in Europe and Asia.

"In light of the above trends net exports are unlikely to contribute positively to growth in the coming quarters. Still, the improved April number, coupled with upward revisions to previous months, suggest much less drag from net exports in the previous quarters. Growth in 14Q4 should see a solid upward revision of about 0.7pp, with a much smaller revision to 15Q1 (+0.1pp). At the same time, the encouraging April numbers suggest that net trade could be largely neutral during the current quarter." adds TD Economics