- The US trade deficit narrowed to -$44.3 billion in December from -$45.7 billion in November. The smaller-than-expected deficit reflected a greater shrinking of the goods deficit than indicated in last week’s advance trade report.
Exports jumped 2.7% to retrace two consecutive monthly declines. December’s gain was driven by goods exports, with strong increases in capital goods and other merchandise exports. Food exports declined for a fifth consecutive month with July’s surge having now largely run off (that increase contributed to net exports adding substantially to GDP growth in Q3/16). Imports increased for a third consecutive month (+1.5% in December), led by autos and industrial supplies. Capital goods imports also contributed to the gain, although with exports in the same category rising substantially in December, the narrower capex balance implies slightly weaker US equipment investment than the separate shipments data would indicate.
Today’s report showed slightly more improvement in the US trade deficit than the BEA incorporated into their advance reading of Q4/16 GDP. Thus there is scope for the reported 1.7 ppt drag from net trade to be revised up slightly to -1.6 ppts. With recent inventory data also implying stronger investment, our current monitoring is for Q4/16 GDP growth to be revised to an annualized 2.1% pace from the 1.9% gain initially reported.
It should remain the case that net trade acted as a very modest drag on growth last year, in contrast with 2015 when more substantial USD appreciation and relatively strong domestic demand contributed to higher imports and stagnating exports. Our forecast assumes the currency will once again strengthen this year amid strong performance of the US economy and rising policy rates. However, we expect net trade will once again subtract only modestly from headline growth this year, while strong domestic spending will drive GDP growth to an above-trend 2.3% rate in 2017.