The U.S. international goods balance shrank in November, as both imports and exports declined, but a large negative revision to the October deficit could indicate an increasing drag on gross national product in the fourth quarter from trade.
The ‘advance trade in goods’ report which provides early release for key figures from last month's international trade data, recorded November's goods deficit at -$60.500 billion. This was close to the median forecast of -$60.720 billion and down slightly from October’s $61.276 deficit.
However, the improvement in the trade gap was solely due to the 5 percent downward revision in Octobers’ deficit, now at -$61.276 billion, from its initial list at -$58.411 billion. This left October’s deficit slightly bigger than the subsequent November deficit.
This trade in good reports does not contain service sector figures, which tend to be positive for the U.S, and reduce the overall trade deficit which is expected to be -$44.10 billion in November. The entire report will be issued on January 6th.
International trade, as utilized in government statistics, has an essentially mercantilist effect on GDP. A positive balance, which the U.S has not had since the early 1990s adds to GDP and a negative balance subtracts.
While the slight decline in the good’s deficit might be considered a positive development, the underlying economic logic means the opposite.
First, the substantial increase in the October deficit means that fourth quarter GDP, already running well below 2.0 percent annually, will likely be reduced further as the larger deficit negates domestic growth.
Second, both imports and exports fell in November. The decline in exports, hammered by weak global growth and a strong dollar is not unexpected, but weak imports are a reflection of the strength of the U.S. economy. If people are suddenly buying fewer imported goods, that hardly speaks of a robust consumer despite the 5.0 percent unemployment rate and steady job creation.
Exports fell 1.9 percent, $2.4 billion, in November ($121.0 billion vs. $123.4 billion) and though the decline in import was less in percentage terms, 1.8 percent ($181.5 vs $184.7), it was larger in dollar terms, $3.2 billion and thus a more telling against domestic consumption.
Exports are likely to remain a drag on U.S economic growth for some time.
If the Fed keeps to its 1.5 percent prediction for the Fed Funds rate by the end of 2016, the dollar could well gain in strength next year, further harming U.S. exports. The first Fed rate hike cycle in almost a decade comes as the ECB and the Bank of Japan are headed in the opposite monetary direction, maintaining or increasing the amount of liquidity support for their own economies.
The Atlanta Fed's GDPNow estimate for U.S. economic growth in the fourth quarter has almost halved in eight weeks. The initial forecast of 2.5 percent on October 30th had dropped to 1.3 percent as of December 23rd. The burgeoning October trade deficit should reduce it yet again.
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