By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. trade deficit narrowed sharply in October as exports soared to a record high, potentially setting up trade to contribute to economic growth this quarter for the first time in more than a year.
The Commerce Department said on Tuesday that the trade gap plunged 17.6% to $67.1 billion. That was the biggest percentage decline since April 2015. Economists polled by Reuters had forecast a $66.8 billion deficit.
"The trade deficit is narrowing big time and pouring even more fuel into the economy's tank which guarantees stronger growth as 2021 comes to an end," said Christopher Rupkey, chief economist at FWDBONDS in New York.
Exports accelerated 8.1% to an all-time high of $223.6 billion. The surge was led by goods exports, which soared 11.1% to $158.7 billion, also a record high. Exports of industrial supplies and materials increased $6.4 billion, with shipments of crude oil advancing $1.2 billion.
Capital goods exports increased $3.1 billion, boosted by other industrial machines as well as civilian aircraft. Food exports rose by $2.1 billion, with soybeans increasing $1.8 billion.
Exports of consumer goods jumped $1.6 billion, lifted by increases in shipments of gem diamonds as well as motor vehicles, parts and engines. The nation exported more services, which rose $1.0 billion to $64.9 billion. That reflected a rise in overseas travel, other business services and charges for the use of intellectual property.
The surge in exports eclipsed a 0.9% increase in imports to $290.7 billion, also a record high. Goods imports climbed 0.7% to an all-time high of $242.7 billion. The rise was led by motor vehicles, parts and engines, which increased $1.5 billion. There were also gains in imports of consumer goods, including cell phones and other household goods.
Imports of industrial supplies and materials fell as did imports of capital goods, pulled down by declines in semiconductors and civilian aircraft.
GROWTH BOOST
Adjusted for inflation, the goods deficit decreased $13.5 billion to $97.6 billion in October. That was the smallest so-called real goods deficit since last December. If the real goods trade deficit continues to shrink, trade could contribute to gross domestic product this quarter. The trade gap has been a drag on GDP growth for five straight quarters.
"We expect stronger export growth and moderation in import volumes to keep the deficit stable next year after reaching multiple record highs in 2021," said Mahir Rasheed, an economist at Oxford Economics in New York. "However, the Omicron variant is a key downside risk that threatens to distort trade flows by slowing the global recovery in early 2022."
The economy is regaining speed after being restrained in the third quarter by shortages and a flare-up of COVID-19 infections, driven by the Delta variant. Shortages because of snarled supply chains caused by the coronavirus are fanning price pressures.
There are signs inflation could remain well above the Federal Reserve's 2% target for a while, also as companies competing for workers raise wages.
A separate report from the Labor Department on Tuesday showed unit labor costs, the price of labor per single unit of output, surged more than initially thought in the third quarter. Labor costs accelerated at a 9.6% annualized rate last quarter, revised up from the 8.3% pace reported in November.
(Graphic: Historic drop in productivity, https://graphics.reuters.com/USA-ECONOMY/RECESSIONTEMPLATE/gkplgldylvb/chart_eikon.jpg)
They rose at a 5.9% pace in the April-June quarter. Labor costs increased at a 6.3% rate compared to a year ago, instead of the previously reported 4.8% rate. Economists had forecast unit labor costs would rise at an unrevised 8.3% pace last quarter.
Hourly compensation increased at a 3.9% rate in the third quarter, rather than at a 2.9% rate as previously reported.
The surge in labor costs came at the expense of worker productivity, which fell at a downwardly revised 5.2% rate last quarter. Productivity was previously reported to have tumbled at a 5.0% pace. It grew at a 2.4% pace in the April-June quarter.
Compared to the third quarter of 2020, productivity fell at a 0.6% rate. It was previously reported to have declined at a 0.5% rate. Hours worked increased at a 7.4% rate last quarter, revised up from the previously estimated 7.0 pace.