The latest U.S. trade numbers do show a drop in real imports, but the situation is neither as dire as it seems, nor necessarily a portent of a faltering global trading system. What we trade can have a lot to do with where we trade, and both have been shifting.

In Focus - Trade Flow Swings

The U.S. June trade numbers showed that real goods imports dropped 0.9% from May, while real goods exports rose 0.5%. Each move continued a broader trend. Comparing goods trade from the first six months of 2023 with the same half of 2022, imports fell 3.1% while exports rose 4.1%.

The chart normalizes the real goods imports data to the start of 2022. Thus, the most recent reading of 97.2 for total imports means that there was a cumulative decline of 2.8% over the 18 months. It also provides detail for the major subdivisions of imports. Normalization makes them look like they’re all of comparable size. They’re not – in decreasing order of year-to-date import volume, the categories are: Capital Goods; Consumer Goods; Industrial Supplies (includes petroleum products); Automotive Vehicles and Parts; and Foods, Feeds & Beverages.

There are several questions we can pose to the data: Is trade dying? Is trade changing? And what does this mean for nearshoring?

On the first, there have been concerns that the recent declines in trade volumes may represent a “fracturing” of the global economy. Here it is important to put the overall drop in context. If one were to look at quarterly data on real U.S. goods imports, keeping the start of 2022 = 100, that quarter marks the all-time peak for US imports. The average value from the 2015:Q1 through 2020:Q1 was 81.1, so the Covid surge was enormous. The pullback we see in the chart is from a significantly elevated level; the drop in imports is one step back after multiple jumps forward.

Alas, this sanguine take will be less than comforting to anyone specialized in consumer goods. As the chart shows, they’re down 14.1% from the start of 2022 and are not far above the November 2022 low for the period. Gloomy as it might look for consumer goods, automotive has seen a 16.1% increase. The other categories have stuck much closer to the overall behavior of imports. But trade is most definitely changing.

This is important in its own right, but it also has implications for questions of decoupling, derisking, or nearshoring. That wouldn’t be true if every trading partner were to offer the United States a similar array of goods. But they don’t. Take but two examples: China has been a very important source for consumer goods, while Mexico is part of a tightly integrated North American production chain for cars.

This means that if U.S. imports shift from consumer goods to autos and auto parts, there are likely to be important implications for the country sourcing of those imports. It will be no surprise if that shift in consumption patterns is accompanied by a decrease in imports from China and an increase in imports from Mexico, which is exactly what we’ve seen. Comparing nominal YTD imports in the first half of 2023 with a year earlier, China is down 25% while Mexico is up 5.3%.

While the data may be interpreted as a geoeconomic realignment, it may simply be a shift from chaises to Chevys.

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Latest Flexport Metrics & Research

This week we look at Asia’s share of U.S. imports and what it might suggest for global trade moving forward.

Economic Developments

U.S. headline inflation accelerated to an annual rate of 3.2% in July, up 0.2 percentage points from June and ending 12 consecutive months of decline. However, core inflation, which strips out food and energy, slowed for the 4th straight month, falling 0.1 percentage points from June to an annualized rate of 4.7%, the lowest since October 2021. Year-over-year growth in shelter costs – with roughly 35% weight in the index – was 7.7%.

U.S. consumer sentiment fell 0.6% from July to a reading of 71.2 in August, after two consecutive increases. Compared to the same month last year, consumer sentiment was 22.3% higher and is nearing the historical average. Year-ahead inflation expectations ticked down 0.1 percentage points from July to 3.3% in August, while long-term inflation expectations also declined by 0.1 percentage points to 2.9%.

U.S. wholesale inventories ticked down 0.5% from May to June, 0.2% more than initially estimated. However, total inventories were 1.3% higher than June 2022 levels. Both nondurable and durable goods inventories shrank month-over-month, by 1.2% and 0.1%, respectively. Within durables, though, auto inventories expanded 1.1% from May to June and were up 19.0% year-on-year; machinery inventories expanded 1.3% and were up 24.3% by the same measure.

Total U.S. household debt grew 0.1% in Q2, reaching a record high of $17.06 trillion. Credit card balances in Q2 rose 4.5% quarterly to $1.03 trillion, surpassing the 1 trillion dollar threshold for the first time.

UK real GDP grew slightly in Q2, up 0.2% from Q1 and 0.4% higher than Q2 of 2022. The increase was driven by a 0.7% expansion in the production sector, with manufacturing output rising 1.6%. Real household consumption also increased 0.7%, mostly in transport and recreation.

Chinese headline inflation fell to an annualized -0.3% in July, marking the first month of deflation since February 2021. The decline can be attributed to a 0.5% annual fall in food prices, as well as a decrease of 4.7% in transportation and communication services.

__Last week’s trade numbers __

• Chinese exports fell 1.2% month-on-month July, contributing to the decrease of 5% year-to-date in July. Amid declining overall exports, auto exports grew 103.8% year-to-date while exports of hi-tech products, which include semiconductors, shrank 14.7%. Exports to ASEAN countries, China’s biggest trading partner, are down 2.0% year-to-date. Larger declines of 8.9% and 18.6% were recorded for exports to the EU and U.S., respectively (see this week’s essay above and our latest Commentary for more).

• UK exports rose 1.8% month-over-month in June 2023, attributed to growth in mechanical machinery and transport equipment. An increase of 3.8% in exports to non-EU countries was offset by a fall of 0.3% in exports to the EU, leading to the sixth consecutive month of more UK exports going outside of the EU than inside. Imports from the EU grew 3.2% while imports from non-EU countries declined by 15.9%.

• Canada’s exports decreased 2.2% from May to June, reaching their lowest levels since the beginning of 2022. A fall of 5.0% in exports of industrial machinery contributed the most to the decline. Exports to the U.S., its biggest trading partner, fell 1.2% month-over-month and were 10.4% below the same month last year.

Political Developments

In its July Monthly Budget Review, the CBO announced that the US federal budget deficit in the first ten months of the 2023 fiscal year was $1.6 trillion, more than twice the size of the debt during the same period in 2022. Outlays are estimated to be 11% higher year-to-date for the 2023 fiscal year than its level in 2022. In particular, net outlays for interest on public debt are up 34% due to higher interest rates.

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