US: Real net exports to boost GDP in Q3 – Wells Fargo

Research Team at Wells Fargo Securities, notes that the US real trade deficit, which enters directly into real GDP calculations, narrowed further in August, marking consecutive month-over-month readings that this metric tightened.

Key Quotes

“It looks like the overall real trade deficit for the third quarter will narrow significantly relative to Q2 and could boost overall GDP growth by ½ percentage point. The positive contribution of real net exports to U.S. GDP growth in the third quarter will occur even though the headline trade deficit number, which does not account for price effects, actually widened in August. Imports on the month were up more than $2.6 billion (1.2 percent), while the value of goods and services exports rose by nearly $1.5 billion (0.8 percent).

The U.S. trade balance is not often associated with positive contributions to GDP, as the balance almost always exerts a net drag on the headline output number. However, the narrowing in the real trade deficit from Q2 to Q3 should boost headline growth. That said, we do not expect real exports to be a driver of U.S. growth on a sustained basis.

So what accounts for this recent narrowing? As in the July trade report, the August data show that soybean exports remained at elevated levels, which has been the greatest factor in the shrinking real trade deficit. However, we do not believe this impressive surge in soybean exports will continue and thus expect the real trade deficit to widen again in September.

Moreover, underlying rates of economic growth in many of the country’s trading partners is lackluster, which tends to depress the trend rate of real export growth. The year-over-year growth rate of U.S. real exports slipped into negative territory in Q3-2015 and it remains there today. On the other hand, real imports likely will continue to trend higher in coming quarters as the U.S. economic expansion remains intact.

Moreover, we look for the value of the dollar to appreciate modestly versus many foreign currencies in coming quarters, which will be a slight negative for U.S. export growth. In sum, we expect that real net exports will revert to being a modest drag on U.S. real GDP growth in coming quarters.”