U.S. Trade Deficit Widened in February: Is Renewed Dollar Strength Stunting Export Volumes?

According to the U.S. Commerce Department, total February exports of $143.2 billion and imports of $182.9 billion resulted in a goods-and-services trade deficit of $39.7 billion, up from $37.0 billion in January (revised). February exports rose by $0.3 billion over January’s $142.9 billion, while imports were $3.0 billion higher than January’s $179.8 billion.

There is a correlation of over 0.60 between the trade deficit and “broad” dollar index (a relative measure of value against a basket of 26 other currencies). I.e., the dollar’s value has some influence on the size of the trade deficit. In general, the deficit widens when the dollar depreciates, and shrinks when the dollar appreciates (lower graph). The trade deficit has been rising since May 2009, partly because the dollar weakened after March 2009, but could begin shrinking again as a result of the dollar’s appreciation since November 2009.

This points to a dilemma for U.S. manufacturers: A weaker dollar makes their products relatively more attractive in both the domestic and export markets, but it also tends to worsen the trade deficit. Conversely, a stronger dollar stunts demand for their products, but improves the overall trade deficit. In a sense, then, what’s good for exporters isn’t necessarily good for the economy as a whole.

Dollar strength appears to be decreasing U.S. forest products export volumes and stimulating a greater volume of imports. That statement may seem to contradict the contention that a stronger dollar narrows the trade deficit, but that apparent disconnect is at least partly resolved by realizing the trade deficit reflects the interaction of volume and per-unit value while the lumber and paper trade data measure just tons or board feet. Exports of pulp, paper and paperboard decreased 6.2 percent in February relative to January (although they were 13.6 percent higher than a year earlier). Imports rose 2.7 percent between January and February, but were 2.2 percent lower than in February 2009. The picture is a bit murkier for lumber: Exports rose 6.9 percent in February at the same time imports also rose 13.0 percent. Lumber exports were up 36.8 percent on a year-over-year basis in February, while imports were 3.6 percent higher.