The unexpected narrowing of the U.S. trade deficit in November can be attributed to a decline in imports of consumer goods, reaching a one-year low, driven by a slowdown in domestic demand.
If this trend continues into December, it may have no significant impact on fourth-quarter economic growth.
The Commerce Department’s report also highlighted a decrease in exports for November, reflecting cooling overseas demand.
Slower demand is evident both in the United States and abroad, primarily due to substantial interest rate hikes by global central banks since 2022, aimed at addressing rampant inflation.
Market expectations suggest that the Federal Reserve’s cycle of raising interest rates has likely concluded, with a potential start of lowering borrowing costs as early as March.
Andrew Hunter, Deputy Chief U.S. Economist at Capital Economics, remarked, “The weakness of both exports and imports in November suggests that weaker growth overseas is now being matched by a softening in domestic demand too.”
The Commerce Department’s Census Bureau reported a 2.0% contraction of the trade deficit, totaling $63.2 billion.
The October data was slightly revised to show a widening trade gap of $64.5 billion, previously reported as $64.3 billion.
Economists polled by Reuters had predicted a rise in the trade deficit to $65.0 billion for November.
Imports witnessed a 1.9% decline, equivalent to $6.1 billion, reaching $316.9 billion. Goods imports experienced a more substantial drop of 2.3%, amounting to $257.4 billion.
Notably, imports of consumer goods fell by $4.1 billion, marking the lowest level since November 2022, primarily driven by a $1.9 billion decrease in cell phones and household goods.
There were also declines in imports of pharmaceutical preparations and industrial supplies and materials, including petroleum products. However, crude oil imports increased by $1.5 billion. Capital goods imports decreased by $0.7 billion, influenced by declines in drilling and oilfield equipment, indicating weak business spending on equipment continued in the fourth quarter.
Exports in November decreased by 1.9%, totaling $4.8 billion, bringing the figure to $253.7 billion. Goods exports saw a drop of $5.4 billion, with industrial supplies and materials falling by $3.6 billion, primarily due to lower oil prices. Exports of motor vehicles, parts, and engines also declined, likely due to production delays following strikes by the United Auto Workers union.
Consumer goods exports reached their lowest level since December 2022. However, exports of capital goods reached their highest recorded levels.
In response to this data, stocks on Wall Street traded lower, while the dollar strengthened against a basket of currencies, and U.S. Treasury prices rose.
The goods trade deficit narrowed by 0.6% to $89.4 billion in November.
When adjusted for inflation, it contracted by $2.3 billion, or 2.7%, amounting to $84.8 billion.
The real goods trade deficit has been relatively stable, averaging $86.0 billion in the fourth quarter, similar to the third-quarter average.
Economists had previously expected trade to have a minor negative impact on fourth-quarter GDP, following a neutral contribution in the July-September quarter. Trade has not contributed positively to GDP growth for two consecutive quarters.
Businesses have been scaling back inventory accumulation in anticipation of slower demand in the wake of the Federal Reserve’s interest rate hikes since March 2022.
This is expected to curb growth in the fourth quarter, with the government scheduled to release its snapshot of GDP growth for the October-December period later this month.
The goods trade deficit with China decreased by $2.4 billion, reaching $21.5 billion, driven by a sharp decline in imports.
Goods exports to China also experienced a decrease, which is typical for November, as most businesses would have completed their holiday shopping orders.
Although disruptions in the Red Sea, such as attacks on container ships by Iran-aligned Houthi militants, have caused companies to reroute vessels and increase costs and insurance premiums, economists believe the impact on U.S. trade will likely remain modest.
Drought-related shipping delays through the Panama Canal may pose a more significant downside risk.
In terms of services, imports fell slightly by $0.1 billion, totaling $59.6 billion, as an increase in travel was offset by a drop in transport.
Services exports, on the other hand, rose by $0.6 billion, reaching a record high of $85.7 billion.
This increase was driven by travel, other business services, transport, and government goods and services. Consequently, the services surplus reached $26.2 billion, the highest since March 2018.
Looking ahead, economists anticipate a moderation in trade flows due to a slowdown in demand and growth, both domestically and abroad.
Rubeela Farooqi, Chief U.S. Economist at High Frequency Economics in White Plains, New York, summed up the outlook, stating, “The outlook for trade flows going forward is likely one of moderation, given the trajectory for demand and growth should slow, both domestically and abroad.”