U.S. trade deficit narrows slightly in December, trade to be a modest drag to GDP growth in Q1 2017

The U.S. trade deficit contracted in December to USD 44.3 billion from USD 45.7 billion seen in November. The deficit figure came in a bit better than the consensus expectation. Exports rebounded in December, rising 2.7 percent, following two months of contraction. The rise was driven by capital goods that grew 7.9 percent sequentially, industrial supplies that rose 2.1 percent, automotive exports that grew 1.4 percent and consumer goods that gained 0.5 percent. In real terms also the overall exports gained strongly by 3.6 percent.

Meanwhile, imports grew 1.5 percent, with all major categories recording gains. Most notably, automotive sector imports rose 5.5 percent, whereas goods imports in real terms were up 1.5 percent.

Looking at trade volume trends, both imports and exports rebounded in the second half of 2016 following a stagnant performance earlier in 2016. This is pretty consistent with an acceleration in economic growth both at home and abroad, noted TD Economics.

The U.S. trade deficit in goods contracted for the whole of 2016 to USD 750 trillion and is below the peak deficits witnessed in 2006 to 2008 period when oil prices were at a record high. But the trade surplus in services contracted a bit last year as the strong currency resulted in a more rapid growth in services imports such as travel. Thus the overall trade deficit expanded slightly to USD 502 trillion in 2016, as compared with USD 500 trillion in 2015.

“A strong dollar has been exerting a considerable drag on goods inflation, but that affect will likely start to move into the rear view mirror in the coming months. This will add to strengthening core price pressures in the latter half of the year”, added TD Economics.

Trade was a considerable drag to the fourth quarter GDP growth, subtracting 1.7 percentage points, after a solid rise in imports. However, this is unlikely to be repeated in the first quarter of 2017 and is expected to subtract a modest 0.1 percentage points instead, noted Barclays in a research report.

At 5:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was bullish at 89.8407. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex