US: trade dynamic to reverse in the third quarter - Wells Fargo

Analysts at Wells Fargo, point out that exports in July fell for the second straight month, down another 1.0% with a drop on the goods side swamping a scant pick-up in service exports. They noted that trade is poised to weigh on Q3 growth.

Key Quotes: 

“The blowout GDP print for the second quarter was due in large part to the uncharacteristically large contribution from trade. Net exports boosted the headline GDP number in the quarter by a whopping 1.2 percentage points.”

“To the extent that some U.S. businesses rushed to get merchandise out the door before these retaliatory tariffs went into effect, the surge in exports during the second quarter should not be altogether surprising. Among the various goods export categories, the pattern is clear: consumer goods, capital goods, as well as food and beverage all saw monthly increases of 3% or more in May followed by back-to-back declines in June and July.”

“After having boosted trade in the second quarter, we expect the trade dynamic to reverse in the third quarter, with net exports saddling GDP with at least a percentage point drag.”

“Trade dynamics are inherently volatile with global growth, commodity cycles and currency valuations all adding to the variability. The introduction of tariffs and talk of potential trade wars certainly do not reduce the variability in international trade.”

“Even if the tariff fights were to be settled amicably tomorrow, the fundamentals are not supportive to trade being a significant driver of growth over the next couple of years. The expected steady growth in business capital expenditures and consumer outlays implies similarly consistent growth in imports. Additionally, since January, the value of the dollar against a trade-weighted basket of the currencies of our major trading partners is up more than 6%. All else equal, that makes U.S.-made goods more expensive to our trading partners.”