By Ryan Barnes
Release Date: International Trade - around the 19th of the month
Release Time: International Trade - 8:30am Eastern Standard Time
Coverage: International Trade - two months prior
Released By: Bureau of Economic Analysis (BEA)
Latest Release: http://www.bea.gov/international/index.htm


Background
Investors and policymakers are increasingly using trade balances and information as a way to determine the health of the U.S. economy and its relationship with the rest of the world. The indicator within the Trade Balance Report that is most well known is the
nominal trade deficit, which represents the current dollar value of U.S. exports minus the current dollar value of U.S. imports. The report also covers trade balances for services, such as financial and informational management, of which the U.S. is currently a large exporter, creating a surplus in this category. In the physical goods category, the largest components of the monthly nominal value are for consumer goods and energy (petroleum).

There are several different aggregate measures of trade balance that are recorded and presented in the media, but the one that is most cited will be the current account,a measure of the net of physical goods trade, services trade, investment income and unilateral transfers. A more detailed breakdown of the financial receipts between the U.S. and abroad is available quarterly, summarizing the monthly data and reporting adjustments as needed; it is also released by the Bureau of Economic Analysis (BEA). (To learn more, read Understanding The Current Account In The Balance Of Payments and Current Account Deficits.)

What it Means for Investors
The U.S. has been running a trade deficit for more than 20 years (and a current account deficit for some time as well), set against the backdrop of a long-term U.S. economic expansion. As a nation, the U.S. imports more than it exports, which, in itself, is not a bad thing. Because the U.S. economy has been expanding for so long, most other nations have not been able to keep up, meaning that U.S. demand for things as a nation is higher than other nations' demand for U.S. goods. What causes worry among some is the long-term trend of more money flowing out than coming back in.

The consensus is that the trade deficit must be balanced out by an equal dollar amount of foreign investment in U.S. assets. For example, if the U.S. spends $1 billion dollars to purchase computers from Japan, by definition, Japan is holding $1 billion U.S. dollars or other dollar-denominated assets. In practice, most of the balance in trade is made up by foreign countries holding U.S. Treasury securities. But when interest rates are low, our debt is not as attractive on a risk-adjusted basis, creating concern that our investments will no longer attract foreign ownership, causing the value of the dollar to drop and leading to decreased world purchasing power.

The current account as a percentage of total gross domestic product (GDP) is an important metric because it shows how large the current account number is in relation to overall output in the economy.

The Trade Balances Report can move the markets upon release if the data shows a marked change from the prior period. Compared to other indicators, this report is relatively hard to estimate outside of petroleum, so some surprise factors can occur from time to time. Most investors want to see the trade balance maintain current levels or fall, as it is a sign that exports are rising, and the companies who export are increasing sales in those areas of the world.

Strengths:
  • Monthly releases are concise and give results in nominal (dollar) terms.
  • Highlights which countries make up the largest percentages of the balance, as well as rates of change
  • Results shown against the backdrop of the past six months
  • Trade represents approximately 25% of total economic activity and is a large component of GDP.
Weaknesses:
  • Monthly report doesn't show a complete transaction reconciliation (quarterly release does).
  • Inconclusive as to the long-term effects of the stock market and economy of a trade deficit or surplus.
  • Volatile due to oil prices and seasonality
The Closing Line
The Trade Balance Report can give valuable clues to future swings in GDP not explained by internal consumption and production, so the report helps to "close the loop" on GDP estimation variables. The more investors know about trade balances and how policy makers interpret the data, the more helpful it becomes in making investment choices.

Next: Economic Indicators: Wholesale Trade Report »


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