Payden & Rygel: Real capital goods and industrial supplies imports vs industrial production

February 13, 2025

Perhaps coincidentally, in a week that featured new tariffs, the December 2024 U.S. International Trade in Goods and Services Report from the Census Bureau showed that the U.S. nominal trade deficit surged to an all-time high.

'See!' Many American observers might exclaim, 'Cheap imports are hampering our domestic production!' But not so fast. A common misconception is that cheap imports detract from U.S. growth.

However, U.S. consumers have been benefiting from decades of declining goods prices. Further, finished consumer goods account for only 13% of the monthly import volume, while 73% of U.S. imports are capital goods and industrial supplies, such as equipment and auto parts. Capital goods are key inputs to the U.S. domestic manufacturing process. Indeed, as capital goods imports have marched higher in the 'Free Trade Era', so has U.S. industrial output!

In other words, world economic activity has become more complex and integrated. And tariffs? Tariffs threaten higher prices and disrupt economic activity, as 'tariffed' goods could hamper domestic manufacturing rather than support it.