Fed leaves rates unchanged, US trade deficit falls

As widely expected, the Federal Reserve left the federal funds rate unchanged at 5.25 percent yesterday.

Less expected was a sharp drop in the US trade deficit. MarketWatch reports:

The nation's trade deficit shrank 8.4% in October to $58.9 billion from $64.3 billion in September, the Commerce Department said...

This is the smallest trade gap since August 2005. The one-month improvement in the deficit is the biggest since December 2001...

Exports rose 0.2% to $123.6 billion in October. Imports fell 2.7% to $182.5 billion. This is the largest monthly decline in imports since December 2001.

Imports of goods alone fell 3.4% to $153.6 billion. The largest drop came from imports of industrial supplies, principally crude oil. The United States imported a record amount of food and consumer goods in October.

Meanwhile, exports of goods alone slipped 0.2% to $88.5 billion. However, the United States exported a record amount of capital goods and consumer goods in the month. Exports of civilian aircraft declined in October.

Brad Setser has more analysis, of which the key points (in my opinion) are:

... [T]he October data suggests that the rise in non-oil imports in the third quarter seem to have ended, if not reversed itself – on the back, one assumes, of a slowing US economy...

... US export growth has been strong enough to offset the growing US non-oil import bill for the last couple of years. The increase in the overall trade deficit has been driven by rising oil prices...

... [O]f the future...the most likely outcome is that the US trade deficit stays roughly stable so long as oil prices stay stable. I suspect the US trade balance with Europe will start to improve in 2007 if European growth remains strong, while the US trade balance with Asia will continue to deteriorate. Both import and export growth are likely to slow.

Menzie Chinn at Econbrowser covers similar ground.