U.S. Trade Deficit Hits Record High in December

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. trade deficit in goods widened to a record high in December, likely as businesses front-loaded imports of industrial supplies and consumer goods in anticipation of broad tariffs from President Donald Trump’s new administration.

The deterioration in the goods trade deficit, reported by the Commerce Department on Wednesday, raises the risk of a sharper slowdown in gross domestic product (GDP) growth in the fourth quarter than economists had anticipated. The government is set to publish its advance GDP estimate for the last quarter on Thursday.

The report also indicated that inventories at wholesalers and retailers were drawn down last month. A wider trade deficit, resulting from an influx of imports, is typically offset by a rise in inventories when calculating GDP. Trade and inventories are volatile components of GDP.

The Atlanta Federal Reserve slashed its fourth-quarter GDP estimate to a 2.3% annualized rate from a previous 3.2%. The economy grew at a 3.1% rate in the July-September quarter.

“It seems reasonable to think that a substantial share is due to attempts to import raw materials before prices potentially jump after the imposition of new tariffs,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

“Those pre-emptive purchases probably continued into January. A similar wave of pre-emptive buying is likely putting upward pressure on underlying imports too.”

The goods trade gap increased by 18.0% to $122.1 billion last month, the largest since the government began tracking the series in 1992. Goods imports rose $10.8 billion, or 3.9%, to $289.6 billion, while exports fell $7.8 billion, or 4.5%, to $167.5 billion.

Trump has promised to impose or significantly raise tariffs on imported goods, including those from China, Canada, and Mexico, with tariffs on Canadian and Mexican goods potentially coming on February 1.

“The trade deficit, especially on a bilateral basis, will receive increased attention as the Office of the U.S. Trade Representative begins its examination of foreign trade practices that are unfair to the U.S. and the review of the Economic and Trade Agreement between the U.S. and China,” said Kathy Bostjancic, chief economist at Nationwide.

The Federal Reserve maintained its benchmark overnight interest rate in the 4.25%-4.50% range after a two-day policy meeting on Wednesday, having reduced it by 100 basis points since September. The policy rate was increased by 5.25 percentage points in 2022 and 2023 to combat high inflation.

Stocks on Wall Street declined, the dollar gained against a basket of currencies, and U.S. Treasury yields rose.

WEAK EXPORTS

The rise in imports followed a 4.3% surge in November. Last month’s increase was led by an 18.9% jump in imports of industrial supplies, including petroleum. Imports of consumer goods increased by 3.1%, while those of capital goods gained 1.7%. However, motor vehicle imports decreased by 5.5%.

There were also declines in food and other goods imports.

Exports fell after a 3.3% increase in November. Consumer goods exports plummeted 8.5%, while motor vehicle exports dropped 6.7%. Industrial supplies exports fell 4.8%, and shipments of other goods decreased by 6.1%. Food and capital goods exports also declined.

Economists estimate that trade, which has negatively impacted GDP for three consecutive quarters, could decrease growth by as much as a full percentage point in the October-December quarter. Still, strong consumer spending is expected to offset the anticipated trade downturn, bolstered by a resilient labor market.

The economy is expanding well above the 1.8% rate that the Fed views as non-inflationary growth.

A strong dollar, resulting from a relatively tight monetary policy stance, may be making U.S. manufactured goods less competitive globally, hindering exports.

The dollar gained 9.0% against the currencies of the U.S.’s main trade partners in 2024.

With wholesale inventories falling 0.5% and retail stocks declining 0.3% last month, some economists remain skeptical that pre-emptive buying of foreign goods ahead of tariffs solely accounts for the trade deficit surge.

“If firms were stocking up, then we should expect to see a spike in December inventories,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. “I would expect some giveback on the trade deficit in January.”

The decline in wholesale inventories was observed across long-lasting manufactured and nondurable goods.

Retail inventories fell, influenced by a 1.2% drop in motor vehicles and parts inventories. Excluding motor vehicles and parts, retail inventories rose 0.2% after a 0.4% increase in November. This component contributes to GDP calculations.

“The surprise declines in wholesale and retail inventories point to a significant drag on growth from private inventories too,” said Pantheon Macroeconomics’ Allen. “This suggests companies may have underestimated the surge in pre-emptive purchases, likely prompting even more imports as inventories are rebuilt.”