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Economic Forecasts

Widening Trade Gap Sparks White House Worry

Kiplinger's latest forecast on the direction of the trade deficit

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GDP 2.1% growth in ’17, following 1.6% in ’16 More »
Jobs Hiring pace should slow to 160K/month in '17 More »
Interest rates 10-year T-notes at 3% by end '17 More »
Inflation 2.5% in '17, up from 2.1% in '16 More »
Business spending Rising 3%-4% in ’17, after flat ’16 More »
Energy Crude oil trading from $55 to $60 per barrel in May More »
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Retail sales Growing 4.2% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

A strong dollar is helping to pull in a rising tide of imports that will widen the U.S. trade deficit by 4% this year. That increase will be on top of back-to-back deficits of just over $500 billion in both 2015 and 2016. These persistent trade shortfalls are high on the Trump administration’s radar screen as it searches for ways to implement “America-first” policies that will bring jobs and production back to the United States.

It’s difficult to shrink the trade deficit because strong U.S. consumer spending is fueling demand for imported goods. Steady if unspectacular U.S. economic growth has led to strong job markets and rising incomes. That puts more money in consumers’ hands while the dollar’s rising value — up about 4.4% last year against the currencies of major trade partners — effectively lowers the cost of imported goods.

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Dollar strength is also a hurdle for exporters. U.S. goods are more costly in foreign markets from Europe and Asia to Canada and Mexico, where local currencies have weakened against the dollar. The Trump administration holds the view that other nations use unfair trade tactics, and is attempting to take a more one-on-one approach with trade partners. It has withdrawn from a proposed free-trade pact between Pacific Rim countries and wants major changes in the North American Free Trade Agreement with Canada and Mexico.

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In January, the monthly trade shortfall widened 9.6% to nearly a five-year high of $48.5 billion. Imports jumped 2.3%, while exports edged up only 0.6% from December. The deficit with China, always the largest with any single country, shot up 12.8% to $31.3 billion in January. There were a few bright spots: Overall exports of industrial supplies and materials climbed, and petroleum exports hit their highest level since May 2015, a sign of U.S. success in becoming more self-sufficient in energy.

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Sources Department of Commerce, Trade Data