Increasing Deficit a Good Sign
Macro Perspectives: Fri 9 Apr 2021
Reports came out that U.S. trade deficit in February ballooned to a record high of $71.1 billion, outperforming economists’ median expectations of a $70.5 billion shortfall. Why is this number so large and ever increasing? Is it a warning sign for the U.S. economy? While it is true that a larger deficit will chip away at expected GDP gains, this rising deficit is an incredibly positive sign for the U.S. economy, as it relates to the rest of the world.
Firstly, it means that consumer demand is increasing. When American consumers’ confidence increases, their demand is not limited to U.S. produced goods, but spills over to other borders. In other words, U.S. consumers are in better shape to consume goods compared to residents of other nations.
Why is that - the COVID-19 situation is better than continental Europe at this point. While the U.S. continues to fully open its economy, France recently announced another national lockdown. Other major European nations such as Germany and Italy continue to have severe restrictions. Furthermore, the U.S. vaccination program is also comparatively ahead, further helping consumer sentiment and confidence.
Additionally, US fiscal policy has responded more aggressively than other nations, having recently passed a third stimulus bill of $1.9 billion dollars that includes a third round of checks for consumers.
Lastly, foreign demand for U.S. dollars has increased as investors look to capitalize on investing in U.S. assets. As this demand for U.S. dollars increases, the value of the dollar also increases. As a result, foreign goods become comparatively cheaper to U.S. consumers, further increasing the magnitude of the trade deficit.
The economy has not reached pre-pandemic heights. Recovering from the pandemic will be long and imperfect, but this news is not something that individuals should be wary of when making investment decisions. It is another sign that the U.S. economy is improving, and U.S. assets remain strong.
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