The Census Bureau reported that the US economy’s goods trade deficit widened in February to -$75.4 billion from a revised -$75.3 billion in the previous month. This marks the 6th consecutive month of widening trade deficits in the goods side of the economy, and the widest goods trade deficit in the post-recession era.
The results from January and February suggest that trade continues to be a drag on overall economic activity in the US and will likely subtract from growth again when 1st quarter GDP results are released next month. However, from a freight and transportation perspective, the news is far more encouraging. Unlike the previous month which saw total trade volume decline significantly, both goods exports and imports saw healthy gains in February, with year-over-year import growth reaching a fresh post-recession high of 10.8%. (Story continued below)
International trade and freight markets
As a result, this morning’s report bodes well for freight markets despite the negative headline number. International air and ocean freight companies like FedEx and Maersk obviously benefit from the increased volume of trade. Movements both in and out of the country are also helpful for domestic US freight companies, as much of the movement of goods throughout the economy consists of transportation to and from ports for the purposes of international trade.
This is particularly true for long-distance trucking and rail freight, which benefit from long hauls to and from ports on the coast. The American Association of Railroads estimated last year that approximately 42% of all rail carloads and intermodal units, and 35% of annual rail revenue are directly tied to international trade.
Trade policy
This link between international trade and freight has made recent moves on trade policy into a central focus for many transportation companies. Global transportation and logistics companies often throw their weight behind policies that promote free trade, and discussions of tariffs has raised some concerns on the volume of trade going forward as US policy takes on a protectionist theme. Recent announcements of tariffs on Chinese imports have further complicated things, as an escalating trade war with China would potentially carry significant consequences for trade. This is particularly true for movements to and from the West Coast ports such as Los Angeles, Oakland, and Long Beach.
All is not necessarily lost on the trade front, however. The recent steel and aluminum tariffs ended up being far less severe than initially proposed, with major exceptions given for the US’ major steel trading partners. The tariffs on China were announced last week, but details on which industries would be hit and how long the tariffs might last were left unspecified. The administration is expected to provide additional details in a couple of weeks, and there is a good chance that the final form of the China tariffs is less detrimental to trade than the initial announcement would suggest.
Behind the numbers
The trade deficit results were below consensus expectations for the month, with most expecting the deficit to narrow slightly. The conditions in the economy would still generally point towards some narrowing at some point, as the combination of solid global growth and a relatively weak dollar should lead to stronger export growth.
The recent shifts in trade policy are introducing a great deal of uncertainty into the international trade environment, however. Most of the moves made thus far, from the threats to pull out of NAFTA to the steel and aluminum tariffs, have been more bark than bite. Still, it is increasingly unclear what the rules for trade are going to be going forward, which can not bode well for trade volumes, even if the rule changes end up being mostly benign.
Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.