By: Rheaa Rao

Dollar appreciation leading to declining exports widened the trade deficit in January.

The trade deficit in goods and services in January was $45.7 billion- more than what most economists predicted. The deficit widened by $1.0 billion from the revised December numbers. Both exports and imports have declined. While imports have fallen by $2.8 billion compared to December, exports took a bigger hit, falling by $3.8 billion.

A strong dollar and weak global economy has led to low demand for US exports. A decline in imports also suggests a sluggish domestic demand, painting a different picture from the high consumer confidence that the durable goods and retail sales reports suggested.

Exports of capital goods decreased by $1.2 billion, noticeably in drilling and oilfield equipment, which decreased by $0.43 billion, showing lesser investment in the oil industry. In the same vein, imports of crude oil went down by $1.8 billion.

“This is not an oil story,” said Richard Moody, chief economist at Regions Financial Corp, “There has been declining demand in the manufacturing sector with consistent weak demand from abroad and the US dollar appreciation.”

Sure enough, imports of industrial supplies declined by $2.07 billion and imports of capital goods went down by $1.18 billion. It’s these imports that would suggest and stimulate growth in the manufacturing sector, but it to be seems on a downward trend of $2.47 billion from last year.

According to Moody, this decline in the manufacturing sector will lead to low employment that will persist and lead to a weaker dollar, narrowing the trade deficit.

Perhaps this can be seen in a decline in imports of consumer goods by $0.1 billion compared to December. But this was only seen in January estimates; import of consumer goods has increased by $0.7 billion from 2015 showing increased consumer confidence and more disposable income due to low oil prices.

The prediction of a narrowing deficit in the future seems far-fetched to Robert Brusca, chief economist at Fact and Opinion Economics. Brusca believes that the deficit is likely to increase due to oil prices.

“An increasingly strong dollar is going to lead to consistent deficits that we have, it is going to lead to higher US unemployment- which we have, it is going to lead to US inflation- which we have,” he said, “But Democrats and Republicans still believe in a strong dollar policy.”

Brusca said that productivity is low because the dollar has been overvalued for over thirty years. The manufacturing sector is declining because it is expensive to invest in the USA as compared to overseas which leads to more money pouring into the service sector that has slower growth.

A stronger dollar seems to be widening the trade deficit and this trend is set to continue. This could lead to more job losses- Ohio already lost 112,500 jobs in the past month. But a continued decline in imports could also spell a global slowdown.