Imports boost US goods trade deficit to record high as tariffs loom

The US 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 growth in the fourth quarter than economists had anticipated.

The report also showed inventories at wholesalers and retailers being drawn down last month.

A wider trade deficit as a result of an influx of imports is usually offset by a rise in inventories in the calculation of GDP. The government is scheduled to publish its advance estimate of fourth-quarter GDP on Thursday. Prior to the release of the goods trade and inventory data, a Reuters survey of economists forecast GDP rising at a 2.6 per cent annualized rate last quarter. The economy grew at a 3.1 per cent pace in the July-September quarter.

“The record trade deficit cannot be a regular occurrence,” said Jennifer Lee, a senior economist at BMO Capital Markets. “Tariffs are reportedly set to begin in three days.”

The goods trade gap increased 18.0 per cent to $122.1 billion last month, the largest since the government started tracking the series in 1992, the Commerce Department’s Census Bureau said. Goods imports increased $10.8 billion, or 3.9 per cent, to $289.6 billion. Exports fell $7.8 billion, or 4.5 per cent to $167.5 billion.

Nobody expects the Fed to move, but Treasury yields have been pricing in more cuts.

Trump has promised to impose or massively raise tariffs on imported goods, including from China, Canada and Mexico. The tariffs on Canadian and Mexican goods could come on Feb 1.

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

The dollar was trading higher against a basket of currencies. USTreasury yields rose.

WEAK EXPORTS

The rise in imports followed a 4.3 per cent surge in November. Last month’s advance was led by an 18.9 per cent jump in imports of industrial supplies, which include petroleum. Imports of consumer goods increased 3.1 per cent while those of capital goods gained 1.7 per cent. But imports of motor vehicles decreased 5.5 per cent.

There were also declines in imports of food and other goods.

The drop in exports reversed a 3.3 per cent increase in November. Consumer goods exports tumbled 8.5 per cent and those for motor vehicles dropped 6.7 per cent. Exports of industrial supplies plummeted 4.8 per cent and shipments of other goods decreased 6.1 per cent. Food exports fell as did those of capital goods.

Trade has subtracted from GDP for three straight quarters. Still, the anticipated drag from trade in the October-December quarter was likely more than offset by strong consumer spending, which is keeping the economic expansion on track, thanks to a resilient labor market.

The economy is expanding well above the 1.8 per cent that Federal Reserve officials regard as the non-inflationary growth pace.

The US central bank is expected to leave its benchmark overnight interest rate in the 4.25 per cent-4.50 per cent range at the end of a two-day policy meeting on Wednesday, having reduced it by 100 basis points since September. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame high inflation.

A strong dollar because of the still relatively tight monetary policy stance could be making US manufactured goods less competitive on the global market, undercutting exports.

Wholesale inventories fell 0.5 per cent while stocks at retailers declined 0.3 per cent last month.