Decline in October Trade Deficit Should Boost Q4 GDP Growth

The trade deficit in October fell more than the consensus forecast had anticipated due to strong growth in exports. The decline in the deficit will have a positive effect on GDP growth in the fourth quarter.

Trade Deficit Much Smaller Than Expected

The U.S. deficit in trade of goods and services narrowed from $44.6 billion in September to $38.7 billion in October (top chart). Not only was the outturn the smallest deficit since January, but it was also significantly less than the $43.8 billion deficit that the consensus forecast had anticipated. Exports of goods and services jumped by $5 billion in October while imports fell $900 million.

On the credit side of the ledger, export gains were concentrated in industrial supplies and materials, which rose $2.6 billion during the month. Despite the $387 million decline in civilian aircraft, exports of capital goods rose nearly $400 million. Exports of automotive products increased by more than $400 million and consumer goods exports were up by $126 million. U.S. exports had been more or less flat over the past few months as growth in industrial production slowed in many of America's major trading partners. The jump in exports in October is consistent with signs of solid growth in many foreign countries in the fourth quarter. The depreciation of the dollar between the second and third quarters of the year may also have played a role in boosting growth in U.S. exports in October.

The decline in imports in October largely reflects the $1.8 billion drop in the value of petroleum imports during the month. However, the recent rise in oil prices should eventually lead to increases in petroleum imports again. Outside of petroleum, imports edged up $600 million during October. Imports of capital goods fell by $900 million, but consumer goods imports shot up $1.3 billion. Moderation in non-oil import growth recently represents some payback for the jump earlier this year.

Decline in Deficit Should Help to Boost Q4 GDP Growth

October's trade deficit data will have implications for GDP growth in the fourth quarter. The widening of the trade deficit in the third quarter sliced 1.8 percentage points from GDP growth during that quarter. In real terms, the trade deficit in the fourth quarter was $4.6 billion smaller than the third quarter's average. If the real trade deficit were to remain unchanged in November and December, then net exports would make a positive contribution to real GDP growth worth about 2 percentage points. Unfortunately, we expect the real trade deficit to widen somewhat in November and December. There likely will be payback for the jump in exports over the next two months, and non-oil import growth probably will strengthen as well. That said, many analysts will likely be making upward revisions to their Q4 GDP growth estimates based on October's deficit figures. The Blue Chip forecast of 2.6 percent annualized growth in the fourth quarter may be revised even higher.