The U.S. trade deficit, the difference between imports and exports, fell to its lowest level in 3 years in 2023, providing a positive contribution to economic growth last year.
According to data released on February 7th, 2024 by the Commerce Department, the overall trade deficit narrowed to $62.2 billion in December, down slightly from $63 billion in November. While the gap widened a bit in December, for the full year of 2023 the deficit shrank significantly from the record highs seen in 2021 and 2022.
The smaller trade deficit acted as a boost to GDP growth in 2023. In the previous two years, the ballooning trade deficit had dragged on economic expansion. But with the gap narrowing last year, net exports made a positive contribution to GDP for the first time since 2020.
There were two primary factors behind the improving trade picture in 2023:
1. Lower Cost of Oil Imports
With oil prices moderating globally, the cost of imported petroleum products declined. Americans imported less foreign oil in 2023 compared to the record imports seen in 2022. Since oil makes up a significant portion of overall U.S. imports, this drop in quantity and price helped bring total imports lower last year.
2. Reduced Consumer Electronics Imports
Americans also imported fewer computers, cell phones and other consumer electronics in 2023 as demand cooled from unusually high levels during the pandemic.
Imports of consumer goods surged to all-time highs in 2021 and 2022 as homebound Americans purchased laptops, tablets and other gadgets. But these imports fell back in 2023 as households pared back discretionary spending amid high inflation and economic uncertainty.
On the export side, U.S. companies shipped a record value of goods and services abroad last year. Exports rose 1.2% to $258.2 billion in December, capping off an annual increase for 2023.
The leading categories of U.S. exports continue to be capital goods like civilian aircraft and industrial machines, autos, pharmaceuticals, petroleum products, and agricultural commodities. Strong overseas demand for these American-made products boosted exports to an all-time high last year.
With imports falling sharply and exports hitting a new record, the trade deficit narrowed to just $859 billion in 2023. That was down significantly from the record $1.08 trillion gap in 2021 and the $926 billion deficit in 2022.
The smaller trade deficit gave a noticeable boost to GDP growth last year. Some economists estimate it added around 1 percentage point to the 2.1% economic expansion in 2023.
That stands in contrast to 2021 and 2022 when ballooning deficits subtracted from GDP growth. The massive trade deficit was one factor behind the economic slowdowns in those two years.
But with global supply chains untangling and consumer demand normalizing, economists expect the trade deficit to remain around current levels in 2024. That means trade should neither boost nor drag on economic growth this year.
The improving trade situation comes as good news for the economy after two years of high inflation, rising interest rates, and volatile financial markets. While risks remain, the shrinking trade deficit points to healing in the global economy after pandemic-related disruptions.
U.S. manufacturers are also benefiting from the record level of exports last year. Strong overseas sales provide a boost to corporate revenues and allow companies to expand production and hiring.
For policymakers and investors, the return of the trade deficit to more sustainable levels removes one drag on the economy. Though other challenges persist, the improving trade picture provides one positive underlying factor heading into 2024.
