The U.S. trade deficit narrowed sharply to $25.3 billion (all figures in U.S. dollars) in December, down from $28.5 billion in November, which is below consensus expectations.

CIBC World Markets notes that imports sagged by over $3 billion, or 2.9%, from November. “The giveback, paced by declines in consumer goods and industrial supplies, suggests foreign suppliers have been absorbing some of the brunt of recent inventory cutbacks. Also figuring in the decline, oil imports fell by a further $520 million from month-earlier levels in the face of continuing slack demand from the industrial sector and lower global crude prices.” Exports showed little change.

BMO Nesbitt Burns says that on an annual basis, the trade deficit shrank to $346.3 billion — down from the record level of $375.5 billion in 2000. “The narrower trade gap will push Q4 GDP growth higher from its original estimate of +0.2%, and put Q1 GDP in solid positive territory,” it says. “By region, the trade gap narrowed with most countries. The deficit with China shrank to $5.5 billion from $7.2 billion the month before. Canada, the U.S.’s largest trading partner, was the only country where the deficit did not narrow.”

RBC Financial Group economists say the lower deficit is a positive for the U.S. dollar and could lead to upward revisions to fourth-quarter GDP. “However, exports were little changed while imports fell 2.9%, indicative of a still-struggling domestic economy.”

BMO concludes, “This morning’s release shows that trade dropped off as the recession unfolded during the latter half of 2001, with U.S. imports especially hard hit. However, the narrowing deficit trend is likely to prove temporary as the U.S. recovery takes hold and import growth heats up while export growth lags.”

CIBC agrees that the Department of Commerce’s original estimate that real GDP rose by an incremental 0.2% in Q4 could be revised upward. “The US appears to be leading other parts of the world in recovery and the US dollar continues to hold up. That means the trade deficit is unlikely to fall rapidly from its still-high levels even with the improvement seen in December. The US dollar could benefit from a rebound in domestic equity markets in coming weeks as investors’ attention shifts away from the accounting worries that have driven recent trading to the improving economy and earnings outlook.”