The financial world has been quietly starting to whisper about some incredible numbers surrounding the U.S. trade deficit. The latest numbers for November show an unexpected drop to $34.3 billion – a four year low. Importantly, the last time the trade deficit was this low the reason was very weak U.S. consumer imports. This time much of the trade balance improvement is attributed to more robust exports. The current account deficit for the U.S., which was dangerously high in 2006 at over 6 percent of GDP, has fallen, approaching 2 percent of GDP.

Domestic energy production, is still the primary driver of the improvement in the trade balance. There was a huge $3.6 billion drop in petroleum imports in the November report, while the U.S. continues to export drilling and mining equipment. Interestingly, there was also a significant increase in the number of automobiles the U.S. exported to the rest of the world, although we also imported more cars than expected.

While energy has been driving this recent trend economists are starting to talk about how this trend will start affecting other areas. The most exciting prospect has to do with U.S. manufacturing. If domestic energy production can keep one of the most crucial manufacturing inputs relatively cheap, maybe U.S. manufacturing really can retool to compete with the rest of the world. There is some emerging evidence to indicate that this might happen, with the Empire State Manufacturing Survey data release this week being the latest.

The value of the U.S. dollar will certainly play a role in this as well. A smaller deficit will boost the dollar in the short term, which fits in our overall dollar bullish view of 2014. But too much dollar strength too soon could cause the whole story to unravel. The manufacturing sector needs a “Goldilocks” dollar scenario – not too strong, not too weak – in order to have the stable environment needed to foster real growth.

My view: We do not have the data yet to indicate a renaissance in American manufacturing, but the components parts are on the American factory floor. I will be interested to see some real progress in this area this year.

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