The US trade deficit widened more than expected in December to its highest level since 2008, as robust domestic demand pushed imports to a record high, potentially putting pressure on the Trump administration as it renegotiates trade deals.
The import-driven surge in the trade gap reported by the commerce department on Tuesday also suggests that 3% annual economic growth may be hard to achieve. Imports, which subtract from GDP, could get a further boost from a $1.5-trillion tax cut package that became effective in January.
The fiscal stimulus comes when the economy is almost at full employment, which means the resulting increase in demand is likely to be satisfied with imports.
“When an economy is at full employment, an acceleration in demand tends to be accompanied by a pickup in import growth and a wider trade deficit,” said John Ryding, chief economist at RDQ Economics in New York.
The trade deficit increased 5.3% to $53.1bn, the highest level since October 2008. Economists polled by Reuters had forecast the trade gap widening to $52bn in December. Part of the rise in the trade gap reflected higher commodity price increases.
The deficit surged 12.1% to $566bn in 2017, the highest since 2008. That represented 2.9% of GDP, up from 2.7% in 2016.
The politically sensitive US-China trade deficit increased 8.1% to a record $375.2bn in 2017.
President Donald Trump has vowed to shrink the trade gap through his “America First” trade policies, which aim to shut out more unfairly traded imports and renegotiate past US free trade agreements.
Trump has repeatedly threatened to terminate the North American Free Trade Agreement unless the 1994 pact linking Canada, Mexico and the US can be made more favourable to Washington. And his administration has launched an investigation into China’s intellectual property practices that could lead to major new trade sanctions on Beijing.
“The terms of trade are not completely unfair,” said Chris Rupkey, chief economist at MUFG in New York. “Don’t forget it is US companies assembling goods outside the country and then bringing them back in, which is the problem with the trade imbalance in goods.” The surge in the December trade deficit was flagged by an advanced goods trade deficit report published in late January. When adjusted for inflation, the trade deficit increased to $68.4bn from $66.5bn in November.
The jump in the so-called real trade deficit at the end of the year puts trade on course to be a drag on GDP in the first quarter. Trade subtracted 1.13 percentage points from economic growth in the final three months of 2017.
The economy grew at a 2.6% annualised rate during that period, helping to lift growth in 2017 to 2.3% from 1.5% in 2016.
The US dollar held onto gains against a basket of currencies after the data. US stock index futures were mixed after two straight days of heavy losses on Wall Street. Prices of US treasuries were trading higher.
Broad tariffs The Trump administration believes a smaller trade deficit, together with deep tax cuts, could boost annual economic growth to 3% on a sustained basis. Late in January, Trump imposed broad tariffs on imported solar panels and large washing machines, and is considering slapping tariffs or quotas on steel and aluminium for national security reasons.
Such actions may prove politically popular with Trump’s working-class supporters, particularly in US states hard-hit by factory closures and import competition. But economists say they were likely do little to change the growth trajectory of the overall trade deficit, which is tied more to macroeconomic factors.
Goods imports increased 2.9% to a record $210.8bn in December. Imports of food, capital and consumer goods were the highest on record in December.
Consumer goods imports were buoyed by a $1.8bn increase in imports of pharmaceutical preparations. Imports of cellphones and other household goods rose by $1.7bn, while motor vehicle imports increased by $1.1bn.
Imports are being driven by robust domestic demand, which grew at its quickest pace in more than three years in the fourth quarter. The country’s import bill in December was also pushed up by more expensive crude oil, which averaged $52.10 per barrel, the highest since July 2015.
Imports from China fell 7.6%. There were also declines in goods imported from Canada and Mexico, the US’s major trading partners.
Exports of goods increased 2.5% to $137.5bn in December, the highest since October 2014. Exports of capital goods hit a record high, lifted by civilian aircraft and industrial machines.
There were also increases in exports of industrial supplies and materials. Petroleum exports increased to their highest level since August 2014.
Exports are being boosted by a strengthening global economy. A weakening dollar is also making US-made goods more competitive on the international market.
Exports to China surged 7.5% to a record high in December. As a result, the US-China trade deficit declined 13% in December.
Reuters