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Keeping the U.S. Trade Deficit in Line

Oil and gas shipments helped keep the deficit steady.

Robert Johnson, CFA, 06/16/2014

A worse-than-estimated U.S. trade deficit for March and a disappointing construction report both raise the possibility that the U.S. economy contracted as much as 1% in the first quarter. Changing retail and inventory data could offset some of that pain, but avoiding an outright decline in GDP will be difficult. Originally, first-quarter GDP growth was reported as a positive 0.1%.

I am not worried, as consumption and employment data indicate a stronger underlying growth rate. Lately, GDP in isolation hasn’t been a great indicator for much of anything. Data for April suggested that growth of 3% or more is possible in the second quarter, offsetting the sting of a disappointing first quarter. The trade report for April was the primary reason for all the new thinking on the first quarter.

The U.S. trade deficit narrowed to $40.4 billion in March from $41.9 million in February. The number was little different from the monthly $39.5 billion average trade deficit for all of 2013. That’s unusual in a recovery, as more economic activity around the world generally boosts imports and exports equally. Because imports are almost 50% larger than exports in dollars, the trade deficit almost always goes up during a recovery.

Additional oil and gas production and shipments explain why the trade deficit has held steady or even improved over the past couple of years, despite an improving economy. Petroleum represents about 5% of all U.S. exports and is up modestly over the past few years. But petroleum- related imports have fallen four percentage points, from 14% to 10% of all U.S. imports, over the past three years in real terms. I think the trade deficit in the first quarter was one of the indicators hit hard by the weather. Bad weather meant lower oil production, difficulties in moving the product to port, and higher domestic demand, limiting exports. This could mean that trade data will look better in the second quarter as exports resume.

The nonpetroleum-related categories showed the more typical pattern of higher import growth than export growth. The data also seem to be saying that world trade is picking up a little; the most recent data is above its 15-month moving average.

Robert Johnson, CFA, is director of economic analysis with Morningstar.

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