The U.S. trade deficit widened in January as demand rose for imported consumer goods, a promising sign of economic recovery amid the COVID-19 pandemic.
The deficit increased 1.9% from December, reaching $68.2 billion, according to numbers released by the Department of Commerce on Friday. Imports rose 1.2% from December, hitting $260.2 billion.
As pandemic-related public health measures restrict local services, many consumers are spending their extra cash on imported goods. This increase in imports reflects a strengthening economy buoyed by government aid and an accelerating vaccine rollout. Meanwhile, exports have remained low, as other countries that lag behind the U.S. in vaccinations and economic recovery have shown reduced demand.
A strong jobs report, released Friday, fills out a portrait of economic rebound, though the U.S. still has a long way to go to reach full employment.
The January trade numbers come in step with President Biden’s inauguration, which initiated a new era of trade policy. A report released by the Biden administration on Monday outlines its approach and indicates it’s likely to keep tariffs on China in place in an effort to compel fair trade practices.
It remains to be seen how the new administration will handle inherited issues, notably China’s failure to fulfill its obligations to increase spending on U.S. goods under the “phase one” agreement negotiated by President Trump last January. While Trump made slashing the deficit a primary goal –– via a trade war with China, tariffs on steel and aluminum, and renegotiated agreements with Canada and Mexico –– the trade gap increased and manufacturing continued to decline over his tenure.
Trade, like the rest of the economy, has been deeply impacted by the pandemic. “Like most every data point it’s a pandemic-affected one. The pandemic is a shock and it’s doing a lot of unusual things,” said Michael Gapen, managing director and chief U.S. economist at Barclays Investment Bank. “In this case, even though the economy is weak, we’re importing a lot because what we’re spending is geared toward goods activity and we’re still a large importer when it comes to goods.”
Businesses are another driver of imports, as many look to increase their inventories to meet growing demand.
The trade gap is projected to continue to grow over the next few months. While it’s possible that the jump in imports in January may have been an isolated result of the COVID relief bill passed at the end of last year, which sent stimulus checks to millions of Americans, most economists believe it’s part of a larger upward trend.
Another spike in imports may come in April and May given the COVID-relief bill working its way through the Senate, which includes direct-transfer payments of up to $1,400.
Demand for U.S. exports is anticipated to remain relatively low. The economies of Japan and other trade partners in Europe and Latin America hit hard by the virus remain depressed.
Economists expect the trade deficit to narrow by early next year, however. As more of the population is vaccinated, consumer spending is anticipated to shift back to local services, revitalizing dormant restaurants, bars, gyms, and hotels across the country. Spending on durable goods may wane in turn as spending on services rebounds.
“As the vaccines are distributed, the service side of the economy is really going to kick up strongly we think,” said Scott J. Brown, senior vice president and chief economist at Raymond James & Associates, a financial services firm based in New York.
The increasing trade gap is unique to the current pandemic-driven economic crisis. Typically, the deficit shrinks during a recession as consumer spending plummets and exports flounder as the economy slows.
Beyond near-term impacts, the pandemic may have a lasting effect on global trade flows. A global shortage of semiconductors, an essential component in the computer chips that underpins most modern technology, has hurt car imports and exports. As a result of pandemic-driven disruptions, businesses may move to decentralize their supply chains instead of relying heavily on suppliers in one or two countries.