As announced by the Bureau of Economic Analysis this morning, the trade deficit edged up by a smaller-than-expected $1.1 billion to $41.9 billion in May. But the real story is what’s happening in the category of manufactured goods, which continues to worsen precipitously. The deficit in manufactured goods rose by $2.8 billion to $56.2 billion, its 2nd worst reading ever. Here’s the chart: Manf’d Goods Balance of Trade. The increase was driven by a $2.8 billion decline in exports to $107.2 billion, the worst performance since October, 2012. Manufactured exports have not risen since September, 2011. (Remember President Obama’s pledge to double exports by January, 2015?)
Some analysts are blaming the strong dollar for the decline in exports. However, an analysis of years of trade data has found that there is absolutely no relationship between trade imbalances and currency valuations. Besides, if the strong dollar were to blame for a decline in exports, then there should be a simultaneous increase in imports. In fact, imports of manufactured goods were flat in May and haven’t risen in six months.
A much more likely explanation is that the trade deficit is simply following the same trajectory that it’s been on for over three decades, thanks to the continued blind application of free trade policy to situations where it makes absolutely no sense.