The U.S. trade deficit narrowed in 2023 despite a slight month-to-month widening in December, pointing towards a recovering economy.
The goods and services deficit increased by $0.3 billion in December, the Census Bureau reported Wednesday. But it fell by $177.8 billion in 2023 overall, the second consecutive annual decrease. Imports and exports also increased in December by upwards of one percent. Although rising imports added to the trade deficit, the increase in exports was able to offset that effect, allowing the downward trend to persist.
The year-to-year decrease indicates a normalization of consumer spending habits as the economy heals from the pandemic. A major contributor is that consumers are spending more domestically, which is a good sign for the economy especially as exports continue to increase year-to-year and imports decrease. Economists are hopeful that normalization patterns will continue in 2024.
“We’re still running a deficit, but the fact that it narrowed over the course of the last two years and, and the services surplus is expanding is encouraging,” said Shannon Seery, an economist at Wells Fargo. “The data came in and sort of as expected.”
Last Fall, exports and imports started to decline but exports took a sharp upward turn in December. The volatile month-to-month changes to exports and imports can be concerning by themselves but are not a solid indicator of the direction the trade deficit or the economy is headed more broadly.
The volatility of the monthly trade flow is sometimes unpredictable and often requires revisions to the amounts reported for exports and imports. The revision to the November report from $63.2 to $61.9 billion showed the deficit narrowed more than previously reported. “What was surprising was the upward revisions to November,” said Seery. “Without those revisions, the deficit would have narrowed.”
One reason for the continued decline in imports is the “move away from spending on physical goods, which are largely imported,” said James Knightley, chief international economist at ING Financial Markets. “Consumers have an increasing interest in experiences,” he continued. “That has meant, you spend more domestically.”
Increased domestic consumer spending and the increase in spending on experiences are two factors that contributed to the service surplus reaching a record high of $26.9 billion in December. Other milestones include the export of foods, beverages, industrial supplies and materials to reach their peak in over a year.
The surplus milestone highlights the sustainability of services, and is a reminder that services are relatively immune from the disruption to supply chains caused by global conflicts, and is evidence of the normalization of consumer spending. “So we’re reverting to those pre-pandemic trends,” Knightley said. “We’ll be hopeful that the trade deficit will continue to narrow a little bit over the next few months.”
While economists are optimistic about the declining deficit, they are watchful for factors that could change such as the disruption of supply chains that can result in the decline of exports. Though not yet a major concern, it is possible that global conflicts like the conflict in the Middle East affecting the Red Sea can slow exports. The Red Sea is an important port for global trade and shipping container traffic. In the past continued disruption to the supply chain put a strain on shipping routes and a hefty price tag on costs of shipping.