Trade continues to drag on growth

November 5, 2024

The US trade deficit widened to $84.4 billion in September, a stunning 19.2% increase, as imports surged in the run-up to the East Coast port strike that occurred in early October, the first to the third. The jump in the deficit in August marks the largest one-month increase in two and a half years; it's also the third largest on record, going back to 1992. That marks a reversal from August, when we saw a large decrease in the deficit. It has increased 11.8% year-over-year, up from 8.9% last month.

The deficit now stands at the highest level since April 2022, when demands on supply chains had surged in the wake of the pandemic. Stronger growth at home than abroad, combined with a strong dollar, has weighed on exporters. At the same time, uncertainties surrounding potential new tariffs, the hurricane season and the East Coast port strike caused importers to conduct early ordering.

According to the monthly data on trade by country, increases in the deficit were broad-based. Some of the largest increases were with China, Mexico, the European Union, Vietnam and India.

Imports increased 3.0% as goods imports surged. Imports of consumer goods increased by $4.0 billion; half of that was pharmaceutical preparations.

We saw holiday-related importing with apparel, household goods and toys. The only category that notably declined was cell phones among consumer goods. Capital goods increased $2.8 billion on a rise in computers and semiconductors. Industrial supplies, which drove the decreases in imports last month, bounced back, adding $2.2 billion; nonmonetary gold (which does not go into the GDP calculation), finished metals, and crude oil topped those categories. Imports of services fell by a small amount, $0.6 billion, on intellectual property charges and travel-related spending.

Despite the surge in imports, the impact on inventories was negligible. Wholesalers drew down inventories, mainly durable goods, by 0.1%, while retailers ex-autos stocked up 0.1%. The outliers were auto retailers, who increased inventories 2.1% in September. The auto industry was especially vulnerable to the port strike, moving some to overstock.

Exports fell 1.2% in September, the largest decline in six months. Weaker growth among US allies has held back exports since the pandemic. Civilian aircraft orders alone accounted for $1.7 billion of the decline; capital goods overall decreased by $1.9 billion. Both consumer goods and industrial supplies declined by $1.4 billion, led by pharmaceuticals and crude oil. Automotive vehicles and parts were the only category to report an increase, up a tepid $0.5 billion on trucks and passenger cars. Exports of services were flat.

In real terms, the goods deficit increased by less than the headline indicates. The nominal goods deficit increased by 15.3%, while the real goods deficit, adjusted for changes in import and export prices, increased by 13.1%. That is still a notable increase but implies a smaller impact on GDP than the headline suggests.