U.S. International Trade in April 2018

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1 Contacts Felix Boni Chief Credit Officer Jordy Juvera Economics Associate Cynthia Pérez Economics Analyst HR Ratings comments on the reduction in the trade deficit for the quarter ending in April vs. January which was modest compared to the increases vs. the same period in 2017 and longer-term trends. The April US international trade report shows that the quarterly deficit through that month, in nominal terms, decreased at an annualized rate of 11.9% (please see Table 1) vs. the deficit for the three months ending in January. Nevertheless, the deficit remains substantially larger than that reported for the October quarter and larger than the deficit for the same period in As recent developments have shown the decline in the deficit is not likely to reduce the complaints of the Trump administration against its leading trade partners. The longer term structural increase in the deficit is likely to continue as consumer goods spending recovers from it post 4Q17 slump. The decline in the April quarter deficit was largely the result of a 9.59% annualized reduction in the deficit in non-petroleum goods. This, in turn, was probably due to temporary weakness in US demand (following the surge in the fourth quarter) which should strengthen again in future months 1. For its part, the nominal dollar deficit in petroleum goods increased at a substantial 26.1% annualized rate largely as a result of changes in relative prices. This distinction is important as in real dollar terms the deficit declined 27.4% (please see Tables 3 and 4). Finally, the nominal services surplus increased at an annualized rate of 3.84%. However, in the long-term the growth in the services sector is not likely to offset the structural increases in the non-petroleum goods deficit. Table 1: Nominal Trade Balance - Immediately Prior Periods Quarterly Data Annualized Change Oct-17 Jan-18 Apr-18 vs. Oct. vs. Jan. Total Balance -45,185-51,241-49, % % Goods Balance -66,619-72,809-71, % -7.41% Petroleum -3,961-5,138-5, % 26.1% Non-Petroleum -61,715-66,830-65, % -9.59% Net Adjustment % % Services 21,434 21,569 21, % 3.84% Source: HR Ratings with data from the US Census Bureau, in part retrieved from FRED, Federal Reserve Bank of St. Louis. Data are seasonally adjusted in millions on a three month moving average basis. The data in Table 2 probably provide a more accurate description of the longer-term structural situation of the trade deficit. The major driver of the deficit is the imbalance on non-petroleum goods which increased 11.77% in the April quarter vs. the same period in This explains the bulk of the 11.03% rise in the overall trade imbalance. In contrast, the United States has a structural surplus in services which for the quarter increased at a much more modest rate of 2.39%. However, because of its smaller absolute size and slower rate of growth it is becoming increasing less relevant. 1 See our Personal income and savings April 2018 report at: Hoja 1 de 8

2 In contrast, the relevance for the overall shortfall of the decline in the petroleum goods deficit is probably greater given its larger size and its sharp rates of decline. Over the last year the petroleum deficit declined by more than 17% in nominal dollar terms. Table 2: Nominal Trade Balance - Annual Quarterly and LTM evolution Quarterly Data LTM Data YoY Change Apr-17 Apr-18 Apr-17 Apr-18 Quarter LTM Total Balance -134, , , , % 10.29% Goods Balance -197, , , , % 7.66% Petroleum -19,885-16,333-69,474-57, % % Non-Petroleum -174, , , , % 10.79% Net Adjustment -3,144-2,434-13,786-10, % % Services 63,792 65, , , % 2.22% Source: HR Ratings with data from the US Census Bureau, parts of which retrieved from FRED, Federal Reserve Bank of St. Louis. Data are in millions of nominal USD on a seasonally adjusted basis. In Table 3 we present the trade data in real 2012 dollar terms. The nominal data are perhaps more relevant in terms of the impact on the value of the dollar in international currency markets. However, in terms of the impact on GDP, real dollars are probably more appropriate as a focus of analysis. For the quarter ending in October, the goods deficit in real terms decreased at an annualized rate of 12.53% vs. the January quarter although it is still 6% larger than the October quarter, also at an annualized rate. In real terms the evolution of the petroleum balance is especially positive as it continued to decline in the October quarter with exports rising and imports falling. Table 3: Real Dollars - Trade in Goods Evolution Quarterly Data Annualized Change Oct-17 Jan-18 Apr-18 vs. Oct. vs. Jan. Goods Balance (78,031) (83,081) (80,345) 6.02% % Petroleum (14,930) (13,614) (12,561) % % Non-Petroleum (60,813) (66,166) (64,163) 11.32% % Net Adjustements (2,288) (3,300) (3,621) % 44.90% Goods Exports 142, , , % 10.50% Petroleum 17,048 17,971 18, % 16.73% Non-Petroleum 126, , , % 9.88% Net Adjustements (1,695) (1,926) (2,042) 45.13% 26.35% Goods Imports 220, , , % 1.66% Petroleum 31,978 31,586 31, % -4.30% Non-Petroleum 187, , , % 2.23% Net Adjustements 593 1,374 1, % 74.58% Source: HR Ratings w ith data from the US Census Bureau. Data are in millions of 2012 USD, seasonally adjusted on a three monhth moving average basis. Hoja 2 de 8

3 In the case of non-petroleum goods, the deficit declined by a substantial 11.57% on an annualized real dollar basis. The major change in the quarter was the significant decline in the rate of growth of imports showing a relatively small 2.23% increase, much lower than the 9.91% annualized increase vs. the October quarter and the especially large 18.2% annualized real increase in the January quarter vs. the October quarter (not shown in tables). Thus, our initial interpretation of the result is that the April non-petroleum goods numbers reflect a pause from the extraordinarily large increase in the January quarter with the likelihood that stronger growth in imports is likely to resume over the next few months along with goods consumer spending. Table 4: Nominal Dollars - Trade in Goods Evolution Quarterly Data Annualized Change Oct-17 Jan-18 Apr-18 vs. Oct. vs. Jan. Goods Balance (66,619) (72,809) (71,421) 14.94% -7.41% Petroleum (3,961) (5,138) (5,444) 88.92% 26.10% Non-Petroleum (61,715) (66,830) (65,166) 11.50% -9.59% Net Adjustments (943) (841) (811) % % Goods Exports 130, , , % 14.71% Petroleum 10,757 12,152 13, % 31.81% Non-Petroleum 118, , , % 13.47% Net Adjustments % % Goods Imports 196, , , % 6.55% Petroleum 14,718 17,289 18, % 30.09% Non-Petroleum 180, , , % 4.86% Net Adjustments 1,495 1,581 1, % % Source: HR Ratings w ith data from the US Census Bureau. Data are seasonally adjusted in millions on a three month moving average basis. In Graph 1 we show the longer-term evolution of the trade balance in nominal USD terms. The graph shows the rebound (or deficit decline) for the last two quarterly periods following substantial recent increases in the deficit especially from approximately May 2016, with a pause during most of the first half of Hoja 3 de 8

4 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Graph 1: Trade balance in billions of nominal USD and annual change (3MMA) MMA in USD Billions YoY Change 30% 25% 39 20% 41 15% 43 10% 45 5% 47 0% 49 5% 51 10% 53 15% 55 20% Source: HR Ratings with data from the U.S. Census Bureau, including data retrieved from FRED, Federal Reserve Bank of St. Louis. Data are seasonally adjusted. Graph 2 presents the breakdown of the deficit between goods and services on a nominal dollar basis. One observation is the small size of the services surplus and its relative lack of movement over the few years. A second is the sharp increase in the goods balance (as reflected in the comments relative to Graph 1 above). A third observation is that the goods deficit currently is roughly at the same level it had reached prior to the financial crisis of Graph 2: Trade balance on goods and services in billions of nominal USD (3MMA) Total Goods Services Source: HR Ratings w ith data from the U.S. Census Bureau, including data retrieved from FRED, Federal Reserve Bank of St. Louis. Data are seasonally adjusted. Graph 3 provides a more detailed breakdown of the evolution in nominal terms of the goods deficit. The first observation is the dramatic decline in the petroleum deficit from roughly April The second is that the improvement appears to have lost momentum from Hoja 4 de 8

5 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 approximately April In terms of the overall deficit this is worrisome given, the third observation, the significant increase in the non-petroleum goods deficit which became larger than the pre-financial crisis imbalance as of early Graph 3: Trade Balance on Goods in billions of nominal USD (3MMA) Total Petroleum Non-petroleum Source: HR Ratings w ith data from the United States Census Bureau. Seasonally adjusted. Given the modest support of the services surplus, should the petroleum deficit show less positive momentum we are likely to see stronger increases in the overall deficit over the next few months. Graph 4: Trade Balance on Goods in billions of Real 2012 USD (3MMA) 0 10 Total Petroleum Non-petroleum Source: HR Ratings w ith data from the United States Census Bureau. Seasonally adjusted. In Graph 4 above we show essentially the same variables as in Graph 3 but in real 2012 dolars as opposded to nominal dollars. Roughly the same trends are seen with the possible Hoja 5 de 8

6 exception that the petroleum deficit continues its most recent decline that began back in early Hoja 6 de 8

7 HR Ratings Senior Management Management Chairman of the Board Vice- President Alberto I. Ramos Aníbal Habeica Chief Executive Officer Fernando Montes de Oca Analysis Chief Credit Officer Chief Operating Officer Felix Boni Álvaro Rangel Public Finance / Infrastructure Financial Institutions / ABS Ricardo Gallegos Fernando Sandoval ricardo.gallegos@hrratings.com fernando.sandoval@hrratings.com Roberto Ballinez roberto.ballinez@hrratings.com Corporates / ABS Methodologies Luis Quintero Alfonso Sales luis.quintero@hrratings.com alfonso.sales@hrratings.com José Luis Cano joseluis.cano@hrratings.com Regulation Chief Risk Officer Head Compliance Officer Rogelio Argüelles Rafael Colado rogelio.arguelles@hrratings.com rafael.colado@hrratings.com Business Development Business Development Francisco Valle francisco.valle@hrratings.com Hoja 7 de 8

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