Trade: Deficit Widens to Near-Record Level

The trade deficit continued to widen in November, hitting a seasonally adjusted $68.1 billion after being revised to $63.1 billion in October — an increase of 8%. The surge in household demand for goods following the onset of the pandemic is the main driver of the growing deficit. The trade balance is also weak because depressed global demand continues to hurt U.S. export growth. Global trade has recovered more quickly than anticipated, but it may slow again over the winter because of renewed restrictions in response to rising coronavirus cases around the world. Through November, the goods and services deficit increased 13.9% from the same period in 2019. The services surplus slightly decreased to $18.2 billion, while the goods deficit increased to $86.4 billion.

Pandemic-induced demand by U.S. households fueled imports, which rose 2.9% and are now above prepandemic levels. Imports were driven higher by inbound shipments of consumer goods, industrial supplies and capital goods. Exports saw a smaller increase of 1.2%, thanks to gains in industrial supplies and materials, and consumer goods. Exports of services rose, but demand for travel and transport services remains subdued because of travel restrictions related to the pandemic. Trade flows have improved somewhat since June, as U.S. states began lifting restrictions on mobility, and foreign trade partners reopened their economies.

Travel exports will likely remain weak in the first half of the year. These exports will be very slow to recover until vaccine distribution is in full swing, which will vary widely across countries.

Trade will likely increase this year in spite of rising cases of COVID-19 in the United States and partial lockdowns across the eurozone, which buys about 15% of U.S. exports. A good portion of the widening in the trade deficit is likely to be temporary. Widespread vaccinations this year will result in a gradual normalization of activity in the services sector and a shift in household consumption away from goods, toward services. This would likely narrow the goods deficit, as households demand for imports would slow.

Sources: Department of Commerce, Trade Data