The U.S. trade deficit in goods widened to a record in December 2018 as a sizeable decline in goods exports was paired with a jump in goods imports. This reversed the decline in the deficit from the previous month, and the drop in goods exports sent yearly growth into negative territory for the first time in over two years.
The Census Bureau reported that the U.S. economy’s goods deficit widened in December to -$79.5 billion on a seasonally adjusted basis, from a revised -$70.5 billion in the previous month. This is considerably larger than consensus estimates of -$73.1 billion, and set a fresh record high for the goods trade deficit.
Struggling exports contributed to the increase in the deficit in December, declining -2.8 percent from November’s levels. This marks the third consecutive decline in goods exports from the U.S., and the largest monthly decline in nearly four years. Year-over-year growth in goods exports continued its free fall from the highs seen in May 2018, dipping into negative territory at -0.3 percent. Goods imports rose 2.8 percent during the month, erasing some of last month’s 3.6 percent decline. Year-over-year growth in goods imports improved in December, but remained relatively subdued at 3.2 percent.
Implications for the economy, freight
The surge in the deficit serves as further evidence that the economy slowed down during the fourth quarter of 2018. International trade will likely not be as big of a drag on GDP growth in the fourth quarter as it was in the third quarter, but December’s results make it unlikely that net exports will make a significant contribution to growth to round out 2018. Combined with the weak readings from factory orders on capital goods, housing starts and retail sales, it now looks like the economy will have grown around 2.0 percent or below in the fourth quarter of 2018 when the Bureau of Economic Analysis releases results tomorrow morning.
Of course, from a freight perspective, the size of the deficit is less important. Both imports and exports require freight movements, and as long as the amount of trade is strong, carriers that are involved in these movements will benefit. As a result, the real concern here is that both export and import growth have clearly downshifted over the last few months. The total value of traded goods (goods exports plus goods imports) rose just 0.3 percent in December, and year-over-year growth tumbled to the lowest point in two years.
Even with the jump in goods imports in December, growth remains well below the pace seen in the first three quarters of 2018. Goods export growth hit a six and one-half year high of 14.1 percent in May 2018, but has decelerated steadily ever since. With growth conditions both in the U.S. and the rest of the world showing signs of slowing down, demand for both export and imports is likely to be soft throughout 2019 after the impressive showing through the first three quarters of 2018. This is not good news for the freight environment, and should weigh on freight demand regardless of what happens with the size of the deficit.
Behind the numbers
The data coming out of the Census Bureau over the past couple of weeks has certainly put a damper on the growth picture for the fourth quarter, which a month ago looked like it might approach 3.0 percent. There was some hope after November’s trade results that the international trade sector could provide a decent boost to growth, but December’s surge in the deficit has erased much of that optimism. Results from the early part of the first quarter have also been weak, and the economy could be in for back-to-back quarters of subpar growth after 2018’s mid-year surge.
Much has been made of the impact that trade policy has on the trade sector, and there is plenty of evidence that suggests that tariffs and the threat of more tariffs have introduced some additional noise into the usual seasonal patterns. The bigger issue here, however, is that the global economy is slowing down, particularly in the areas that influence goods trade. Manufacturing readings from the U.S., China and Europe are all showing signs of moderating or stalling, which affects the demand for traded goods. The U.S. looks to be making progress in terms of resolving some of the trade uncertainty, but if global growth continues to slow, trade volumes will suffer regardless.
Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary bysubscribing.