WASHINGTON - The U.S. trade deficit shrank for the fourth straight month in August, falling to the lowest level since January as exports rose to an all-time high.

The deficit dropped 0.5 percent in August to $40.1 billion, compared to a revised $40.3 billion in July, the Commerce Department reported Friday.

Exports increased 0.2 percent to a record $198.5 billion, aided by increased sales of petroleum, telecommunications equipment and industrial engines. Imports also rose by a smaller 0.1 percent to $238.6 billion.

Even with the falling deficit the past four months, the imbalance so far this year is running 4.2 percent higher than the same period in 2013. A larger deficit acts as a drag on the economy because it means more money going to foreign companies.

The politically sensitive trade deficit with China edged down 2.2 percent to $30.2 billion, only slightly below the all-time high of $30.9 billion set in July. The deficit with China is on track to set another record for the entire year, putting more pressure on Congress and the Obama administration to take steps to curb what China's critics see as unfair trade practices.

U.S. manufacturers say that China is manipulating its currency to gain trade advantages over U.S. companies. They say China undervalues the yuan to make the goods it manufactures cheaper when they are exported, and American products more expensive in China.

A higher trade deficit subtracts from economic growth because it usually means that foreign companies sell more in this country while U.S. producers see fewer sales in overseas markets.

Through August, the trade deficit totaled $335.2 billion, compared to $321.7 billion for the same period last year, when the deficit for the whole year totaled $476.4 billion, 11.4 percent lower than in 2012. For this year, many economists believe the trade deficit will be slightly higher than in 2013, reflecting in part a stronger U.S. economy attracting more imports. They are forecasting the deficit will be a modest drag on overall growth.

The decline in the deficit in 2013 reflected in part a boom in U.S. energy production that has reduced America's dependence on foreign oil while boosting U.S. petroleum exports to a record high.

In August, U.S. exports of petroleum were up 2.2 percent to $14.1 billion while petroleum imports fell 3.8 percent to $27.2 billion. So far this year, petroleum exports are running 16.9 percent above the level of a year ago, putting the country on track to set another record for petroleum exports.