The trade balance reflects the domestic demand for imports and the foreign demand for exports. A bulge in imports may suggest that U.S. domestic demand is strengthening. Export data are one barometer of strength or weakness of the global economy.
It is important to look at the merchandise trade balance and the services trade balance as these can differ substantially. At the time of writing, the merchandise trade balance is in deep deficit, while the services trade balance is in surplus. The merchandise trade balance determines the direction and the variability of the overall trade balance.
A very strong U.S. dollar will increase the price-competitiveness of imports and decrease it for exports. This could lead to a slump in the trade balance. It is important to look at various bilateral balances, such as between the U.S. and Japan, or Europe, or Canada, as a large deficit or surplus can highlight currencies which are under- or overvalued.
