US DATA: Soft Underlying Import Dynamics Underpin Narrowing Trade Deficit

September's goods and services trade deficit came in on the smaller side of expectations, at $52.8B ($63.1B consensus) - the smallest shortfall  since June 2020. It's a far cry from the $100+B deficits in the 1st quarter, and came on the back of the smallest goods deficit since September 2020 ($79.0B). This should be positive in terms of the readthrough for Q3 GDP and maintains the trend of narrowing deficits as the tariff regime settles in.

• The services surplus was steady at $26.2B, the 21st month in a row that it's printed with a 25/26/27B handle.
• As a percentage of GDP the 3-month moving average of the overall goods and services deficit has edged down to 2.4%, compared with just over 5% in Q1 for the smallest shortfall since before the Covid pandemic.
• Goods exports jumped in September in both nominal (3.0% M/M) and real (4.2%) terms, with volumes now up 3.0% Y/Y. Contrast this with imports which are down 6% Y/Y in real terms, at the same level seen at the start of 2024.
• Consumer goods imports soared 18% M/M in September in real terms - which was due entirely to pharmaceuticals, which nearly doubled M/M even as other categories fell (front-running a 100% tariff on branded pharma products starting Oct 1).
• But consumer goods imports are down 7% Y/Y and while capital goods have maintained positive growth it's tapered off substantially (0.9% Y/Y vs double digit rises for the prior 15 months). Industrial supplies import volumes dropped 11% Y/Y, the sharpest fall since early 2023 and leaving  the level around the lowest of the 2000s.
• We take particular note of the drop off in capital imports, as the recent surge had coincided with strong domestic business capex.
• The pharma jump in turn was attributed to imports from Ireland, which at $19.9B in September basically meant that the US imported as much in goods from the Irish as from China ($20.1B) in September.
• While the September pharma jump is a one-off, this is part of a broader trend in which the US goods trade deficit with China has fallen to below 1% of GDP from 2% pre-pandemic, putting it on a par with the EU as a whole (0.8% of GDP).