• The goods trade deficit pulled back from its September record high in October, according to the advance estimate from the Census Bureau. The goods trade deficit was the lowest since October 2020.
• Supply chain turmoil is easing, helping U.S. exports.
• The rush to stock retail shelves ahead of the holidays was already slowing in October, helping to bring down the trade deficit.
• PNC forecasts for the trade deficit to fall further in 2022, contributing to real GDP growth next year.

The trade deficit in goods shrank sharply in October after September’s record high: It fell $14.1 billion dollars to $82.9 billion, down from $97.0 billion in September. This was the lowest goods trade deficit since October 2020. Exports rose 10.7% on the month to $157.4 billion, while imports rose 0.5% to $240.3 billion.

Exports of industrial supplies jumped 11.9% as the oil industry recovered from the shutdowns caused by Hurricane Ida. Aside from the impact of Ida, weekly crude petroleum output in the U.S. has been roughly flat since July but is likely to rise over the next few months; the count of oil drilling rigs operating in the U.S. has been rising steadily as crude oil prices moved higher—the rig count is about a third below the pre-crisis level in November, up from nearly a half below the pre-crisis level in June—and that will translate to higher production.

Exports of manufactured goods also jumped: Capital goods exports rose 7.2% from September, auto vehicles and related products rose 14.4% as the chip shortage became less of a problem, and consumer goods exports rose 8.0%. The headwinds to manufacturing, especially auto, from shortages and supply chain problems are improving, helping exports of manufactured goods.

Exports of foods, feeds, and beverages rose 16.6%.

Import growth was slower across the board, with consumer goods imports rising 0.9%; many retailers front-loaded purchases ahead of the holiday shopping season to ensure shelves were stocked for Black Friday, so import growth was already slowing into October. Imports of auto vehicles and parts rose 5.7% as American carmakers bought more foreign components to support higher production. Imports of industrial supplies and capital goods fell slightly on the month.

The peak is likely past for the trade deficit. The trade deficit surged as American consumers splurged on consumer goods during 2020’s lockdowns, and continued to rise in the summer and autumn of 2021 as the turmoil in global shipping freaked out importers, who front-loaded purchases ahead of the holiday shopping season. The supply chain is coming unclogged now: An index of the cost to ship a freight container from Shanghai to Los Angeles has dropped to the lowest since July in the last two weeks, although it is still double its May level. Shipping costs for bulk commodities like coal, iron ore, or grain have fallen to the lowest since April, though they are still near the top of their range between 2011 and 2019. Shipping costs will likely continue to fall as the seasonal slowdown in China-to-U.S. imports hits in the first quarter, and as energy shortages in Europe and China weigh on demand for industrial commodities over the winter months.

The trade deficit was a big drag on economic growth in the third quarter of 2021, subtracting 1.2 percentage points from net real GDP growth in the quarter. Trade should turn flat to modestly positive for growth in the fourth quarter, then be a net tailwind to growth in 2022 as American importers and other businesses become less concerned about supply chains and more comfortable with their level of inventories.

However, risks to the trade deficit are to the upside over the winter months. If the winter wave of the pandemic is severe, it will keep more Americans at home over the next few months and keep consumer spending concentrated on goods, fueling continued high demand for imported consumer goods.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.