President Donald Trump has made it a signature effort of his economic policies to reduce the annual $600 billion-plus U.S. trade deficit with foreign countries like China, Europe, Canada and Mexico.
"We have massive trade deficits, numbers that you would not believe," Trump said in a speech in August 2017. "This administration is going to fix that."
But nearly three years into his first term, as 2020 presidential election campaigns heat up, the trade deficit might be headed in the wrong direction based on one leading indicator.
The Institute for Supply Management, an association of executives who oversee business-purchasing decisions, published a survey this week showing that manufacturers saw orders for new exports contracting in August for the second straight month.
The institute's index of new export orders slid by 4.8 percentage points to a reading of 43.3, the lowest in roughly a decade. Decreases were noted in oil and coal products, apparel, primary metals, fabricated metal products, electrical equipment, appliances, paper products, transportation equipment, machinery and computer and electronic products.
The survey respondents attributed the "strong contraction" in exports to the anxiety and upheaval among businesses caused by Trump's recently intensified trade war with China. Economists said that many executives are now scrambling to shift their suppliers to low-cost manufacturing locales like Vietnam and Malaysia, even as a weakening global economy reduces foreign demand for U.S.-made products.
"Many respondents continued to note global trade softness as a reason for sluggish activity," the institute said in a statement.
Manufacturers' imports also fell in August, according to the institute, but at a slower pace of 1 percentage point indicating that the overall U.S. trade deficit could be set to widen in coming months.
"Import growth will remain sluggish but positive, given sluggish growth in domestic demand, but the impending drop in exports means that we have to expect net foreign trade to be a drag on overall economic growth," Ian Shepherdson, chief economist at the forecasting firm Pantheon, wrote on Wednesday in a report. "The outlook is grim."
Trump has complained that the dollar is too strong relative to large trading partners' currencies, giving them an unfair advantage in international commerce. He also has repeatedly called on the Federal Reserve to cut official U.S. interest rates, which would theoretically reduce demand for dollar-denominated assets like Treasury bonds, thus leading to a lower exchange rate.
Fed officials have thus far held off on drastic rate cuts, arguing that the domestic economy, with a U.S. unemployment rate close to the lowest in a half-century, doesn't need extreme monetary stimulus at the moment. In July, central-bank officials cut the official U.S. interest rate by 0.25 percentage point to a range between 2% and 2.25%, disappointing Trump and some investors who wanted steeper cuts.
But a steep drop-off in U.S. exports might support the Fed's inclination to cut rates further.
Federal Reserve Bank of New York President John Williams, a top economic advisor to Fed Chairman Jerome Powell, noted Wednesday in a speech that the recent decline in exports, coupled with data showing a weakening manufacturing sector, reflect "slowing global growth and uncertainty related to trade and geopolitical risks."
"Slower global growth reduces demand for our exports and puts a dampener on both U.S. inflation and growth prospects," Williams said. "And these aren't just projections for the future. We're seeing manifestations of slowing growth around the world now."
A U.S. government report on Wednesday showed that the U.S. trade deficit narrowed by 2.7% in July to $54 billion, in line with economists' forecasts. Exports climbed by 0.6%, while imports decreased by 0.1%.
But those data wouldn't capture the full impact of the escalation of the trade war that started on Aug. 1, when Trump tweeted plans to increase tariffs on Chinese imports.
In the ensuing days, China allowed its currency, the yuan, to weaken past a symbolic threshold of 7 per U.S. dollar, in turn prompting the Trump administration to label the Asian country as a currency manipulator. China subsequently announced plans to increase tariffs on U.S. imports, and Trump met those with an additional round of tweeted tariff increases.
The elevated stakes in the tit-for-tat have roiled global markets, while rattling business executives' ability to plan for an uncertain future, according to economists and Federal Reserve officials.
While the efforts may ultimately lead to a shrinkage in the trade deficit, that doesn't appear to be happening for now. July's negative trade balance was some 30% wider than it was three years ago, during the last year of President Barack Obama's presidency.