The US trade deficit shrank nearly 29% in November, the largest amount in 12 years, as weak consumer demand and plummeting oil prices caused imports to sink by a record amount.

The $40.4 billion trade gap was the lowest since November 2003, the Commerce Department said in its monthly report, and another sign of how the global financial crisis has damaged world commerce.

Both US imports and exports declined for the fourth consecutive month after hitting record peaks in July.

“It really says the wolf is at the door. Americans aren’t buying anything,” said Ed Gresser, director of the Progressive Policy Institute’s trade office. “The problem isn’t competition, but lack of demand for anybody’s product.”

The much smaller-than-expected deficit could trim slightly estimates of how much the US economy contracted in the fourth quarter of 2008, analysts said.

But with the report showing consumer demand falling sharply at home and abroad, it is hard to call it good news, said Nigel Gault, chief US economist with Global Insight in Lexington, Massachusetts.

“It is slim comfort that the US cut its demand for imports more rapidly than the rest of the world cut its demand for US exports. That might cushion the US downturn a little, but it is not a route to recovery,” Gault said.

US stocks were little changed on Tuesday, but supported by the hope Congress would quickly release a remaining $350 billion in rescue funds to help stabilize credit markets.

The dollar extended gains against the euro on the trade data and also rose against the yen.

US imports in November fell a record 12% to $183.2 billion, as the global financial crisis scared businesses and consumers into cutting their spending.

US exports fell 5.8% in November to $142.8 billion. Total US goods exports were the lowest since June 2007, while auto and auto part exports were the lowest since October 2006.

Imports of both capital and consumers goods were the lowest since mid-2006, while auto and auto part imports fell to levels not seen since August 2003.

The average price for imported oil plunged a record $25.30 per barrel in November as recession fears deepened. Along with the drop in prices to $66.72 a barrel, the average daily volume of US oil imports fell 1.7 million barrels.

Oil prices have continued to fall since November, suggesting even smaller trade gaps in the months ahead.

“The beauty part is that the trade deficit will shrink as much in the next couple of months because oil prices fell at a pretty constant rate,” said Christopher Low, chief economist at FTN Financial in New York.

Imports from China fell by a record $5.7 billion, or nearly 17%, in November. Even with that sharp decline, the US deficit in goods trade with China totaled $23.1 billion or more than half the overall monthly trade deficit.

The US trade gap with China totaled $246.5 billion year-to-date through the end of November, putting it on the cusp of surpassing the record $256.3 billion set in 2007.

The overall trade deficit totaled $630.9 billion through November, down from $642.7 billion in the same period last year, reflecting strong export growth earlier in 2008. (Reuters)