Plunging U.S. trade deficit could lift economy

WASHINGTON The U.S. trade deficit narrowed sharply in December because oil imports plummeted and total exports rose. The smaller trade gap means the economy likely performed better in the final three months of last year than first estimated last week.

The trade deficit fell nearly 21 percent in December from November to $38.6 billion, the Commerce Department said Friday. That's the smallest in nearly three years.

Exports rose 2.1 percent to $186.4 billion. Exports of oil and other petroleum products rose to the highest level on record.

Imports shrank 2.7 percent to $224.9 billion. Oil imports plunged to 223 billion barrels, the fewest since February 1997.

A narrower trade gap boosts growth because it means U.S. companies earned more from overseas sales while consumers and businesses spent less on foreign products.

Fewer exports were one of the reasons the government's first estimate of economic growth in the October-December quarter showed a contraction at an annual rate of 0.1 percent.

The precise figures for the December trade deficit were not available when the growth estimate was made. The steep decline in the trade gap suggests the government second estimate will be revised higher to show the economy grew slightly in the fourth quarter. Still, sluggish restocking by companies and deep cuts in defense spending are expected to keep growth at the end of last year weak.

The trade deficit also narrowed for all of last year, shrinking 3.5 percent to $540.4 billion.

The politically sensitive trade deficit with China rose to $315.1 billion last year, the largest on record with any country. That could add to pressure on the Obama administration and Congress to take a harder line on China's trade practices. Critics contend they give the Chinese an unfair advantage over U.S. companies and workers.

Many economists believe that trade will give the economy a small lift in 2013. That forecast is based on an assumption that the European debt crisis will stabilize, helping boost U.S. exports to that region, and economic growth in Asia will continue to rebound.

The narrowing trade gap suggests that the sharp decline in U.S. economic growth in the last three month of the year, when GDP fell to - 0.1 percent, will likely be revised upward, according to Capital Economics.

"All this is encouraging and, with the survey evidence improving notably over the past couple of months, it now looks like exports will continue to strengthen as the year goes on," said Paul Ashworth, chief U.S. economist with the firm, in a research note.