U.S. trade gap widens as exports of soybeans, other products drop

The U.S. trade deficit recorded its biggest increase in more than 1-1/2 years in October as exports of soybeans and other products fell, suggesting trade would be a drag on growth in the fourth quarter.

The Commerce Department said on Tuesday the trade gap rose 17.8 percent, the largest increase since March 2015, to $42.6 billion. Higher imports due to rising domestic demand also contributed to the widening of the deficit.

When adjusted for inflation, the deficit rose to $60.3 billion from $54.2 billion in September.

"This widening of the trade deficit at the start of the fourth quarter puts trade on track to subtract a little more than one percentage point from fourth-quarter GDP growth," said John Ryding, chief economist at RDQ Economics in New York.

Exports contributed 0.87 percentage point to the third quarter's 3.2 percent annualized rate of increase in gross domestic product. The jump in exports in the last quarter largely reflected a surge in soybean shipments to China after a poor harvest in Argentina and Brazil.

While the reversal in soybean shipments, which is weighing on exports, suggests trade is likely to subtract from GDP growth in the fourth quarter, consumer spending and a firming housing market are expected to keep supporting the economy.

Rising gas and oil well drilling in response to increasing oil prices is also expected to boost growth this quarter by stimulating demand for manufactured goods such as machinery.

Firming oil prices are starting to have an impact on manufacturing. A second report from the Commerce Department on Tuesday showed new orders for manufactured goods rose 2.7 percent in October after increasing 0.6 percent in September.

That was the largest increase since June 2015 and marked four straight months of gains. Unfilled orders at factories increased 0.7 percent, the biggest rise since July 2014, ending four consecutive months of decline.

The report pointed to an upturn in manufacturing, which accounts for about 12 percent of the economy, after a prolonged slump that helped to erode economic growth. But factory inventories were flat, suggesting a moderate pace of inventory accumulation this quarter.

Following the trade and factory orders reports, the Atlanta Federal Reserve cut its fourth-quarter gross domestic product estimate by three-tenths of a percentage point to a 2.9 percent rate.

U.S. financial markets were little moved by the data ahead of the European Central Bank's policy meeting on Thursday, which could offer new clues on its bond purchasing program. The dollar rose against a basket of currencies, while prices for U.S. Treasuries were mixed. U.S. stocks were largely unchanged.

DOLLAR DRAG

Exports fell 1.8 percent to $186.4 billion in October. They were held down by declining shipments of food, industrial supplies and materials, automobiles and consumer goods.

Exports of soybeans, which helped power the economy in the third quarter, fell again in October. However, exports of capital goods were the highest in October since December 2015.

Some of the drag on exports reflects the residual effects of the dollar's surge against the currencies of the United States' main trading partners between June 2014 and January 2016. The dollar rally appeared to fade for much of the year, giving exports and industries some respite.

But with the greenback resuming its rally in the wake of Donald Trump's victory in the Nov. 8 presidential election, exports could struggle in 2017. The dollar has gained 4.1 percent on a trade-weighted basis since the election.

"Our expectation is that trade will end up being a drag on GDP growth every quarter from now until the end of 2018," said Jay Bryson, global economist at Wells Fargo Securities in Charlotte, North Carolina. "That is not to say that a one-off dynamic like this year's unexpected surge in soybean exports will not result in a quarter in which trade boosts growth."

Exports to Canada, the main U.S. trading partner, fell 2.4 percent in October. There was also a decline in goods shipped to the European Union. But exports to China surged to their highest level since December 2013, while shipments to Japan were the highest in more than two years.

Imports increased 1.3 percent to $229.0 billion in October, the highest level since August 2015. There were increases in food, capital goods and consumer imports, pointing to strong domestic demand. But imports of automobiles and industrial supplies and materials fell.

Imports of petroleum goods were the highest in a year, reflecting an increase in crude oil prices.

Imports from China hit their highest level in a year. With exports outpacing imports, the politically sensitive U.S.-China trade deficit fell 4.2 percent to $31.1 billion in October.

In a third report on Tuesday, the Labor Department said nonfarm productivity, which measures hourly output per worker, rose at an unrevised 3.1 percent rate in the third quarter.

While the increase snapped three straight quarters of decline, the trend in productivity remains weak. Productivity was unchanged compared to the third quarter of 2015.

(Reporting by Lucia Mutikani; Editing by Paul Simao)