U.S. Trade Balance (3-Month Moving Average)

I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

Quick ‘n Easy

The value of what U.S. companies sell to consumers in other countries minus the value of what other countries sell in the U.S. is called the “trade balance.”  It directly impacts our economic activity (as measured by GDP), so it’s important to know what’s happening in this indicator.  Usually, we want this number to be stronger – higher positive number or less negative.  We usually run a trade deficit though, where the trade balance is a negative number.

The United States, like most every other country, has imports (goods and services that are brought in from foreign countries for U.S. consumers to purchase) and exports (goods and services made in the U.S. and sent to other countries for their consumers to purchase.)  If you take the value of our exports and subtract the value of our imports, you get the trade balance.  The trade balance directly impacts the Gross Domestic Product (GDP) calculations, which is the broadest measure of the country’s economic activity.

Here’s what Econoday has to say about what investors think of the trade balance numbers that are released monthly:

Market reaction to this report is complex. Typically, the smaller the trade deficit, the more bullish for the dollar. Also, stronger exports are bullish for corporate earnings and the stock market.

Assuming the result is a positive number (exports more than imports), if the trade balance were to go up in a given month, it means the U.S. is increasingly getting other countries to buy more of its stuff than it brings in from those countries.  That means the value of the U.S. dollar will usually go up in response.  And when other companies are buying more U.S. goods, it means the companies who make them are earning a nice profit (corporate earnings), which is the main reason why stocks would go up.  The funny thing is, if exports do go up and cause the dollar to rise in value, it means that those goods will cost more to other countries’ consumers in terms of their own currency.  And that would make it less likely for them to buy U.S. goods going forward.  See how the markets tend to push things toward an equilibrium?  This is why, for some time now, every time the value of the U.S. dollar has increased, the S&P 500 has usually decreased, because it signals that U.S. exports will probably not sell as much.

Here is a chart from the U.S. Census Bureau showing the monthly trade balance, but keep in mind that the trend I am analyzing is the three-month moving average of this data:

Source: U.S. Census Bureau

Trends and Projections

Below, I will discuss whether the indicator is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.

Trend Analysis

Quick ‘n Easy

We have a confirmed uptrend in the trade balance from July to October 2011.  During this time, the difference between what the U.S. exports and what it imports has been improving by about $1.84 billion per month.  The latest reading, however, was off trend (too low) but not enough to break the trend yet.  This is generally good news, as the trade balance also impacts the Gross Domestic Product (GDP), which is the broadest measure of economic activity.  But the future of this indicator is in doubt given the turmoil in Europe and signs of slowing in other places that buy U.S. goods and services.

Source Data: U.S. Census Bureau

Current Trend: July – October 2011 – During this time, there was a confirmed downtrend, with a 98.7 percent chance that the 3-month moving average of the trade balance was improving by $1.84 billion per month.  Unfortunately, the latest data point came in too low but not enough to break the trend just yet.  We’ll see what happens next month.

Last Confirmed Trend: April – June 2011 – During that time, there was a 97.5% chance that the 3-month moving average of the trade balance was worsening by $1.75 billion per month.

Projected Next Data Point

The next report is for December 2011.  If the original trend is still intact, it suggests the December 2011 trade balance 3-month moving average would be minus (-) $40.25 billion.  This would require the actual reading for December itself to be minus (-) $29.73 billion, which would be least negative figure we’ve seen since June 2009. I fully expect next month’s reading to be off trend (too low) as well.

Easy Take

Although we have an established uptrend (improvement) in the U.S. Trade Balance based on its 3-month moving average, the latest month’s report came in too low to be considered part of the trend.  I expect next month’s reading to be too low as well, and it may put the trend in jeopardy.  This is probably related to the crisis in Europe, which may have decreased their demand for U.S. exports.  That situation has not improved since November, so I would expect to see continued pressure on the trade balance for some time.

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Related posts:

  1. Trade Deficit Continues to Improve – Easy Trends: US Trade Balance 3-Month Moving Average (thru October 2011)
  2. Easy Trends: US Trade Balance 3-Month Moving Average – Likely Positive Trend May Not Last Long (thru September 2011)
  3. Broken Downtrend – US Trade Balance 3-Month Moving Average Trend (thru August 2011)
  4. Easy Trends: Weekly Jobless Claims 4-Week Moving Average Trend (Week ending September 17, 2011)
  5. Easy Trends: Weekly Jobless Claims 4-Week Moving Average Trend (Week ending September 24, 2011)