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A Surprise Dip in the Trade Deficit

By Michael Englund At last, a U.S. trade deficit that came in below expectations. A government report released May 11 showed the trade gap unexpectedly falling to $55 billion in March -- well below economists' median forecast of $61.5 billion -- from $60.6 billion in February. Exports rose an expected 1.5% in March following a flat pattern in the January and February period, while imports dropped a hefty 2.5%, after a revised 1.5% gain in February and a 1.8% gain in January.

The trade figures for March revealed most of their surprise through an unwinding of January and February strength in consumer-goods imports. This component fell an enormous 6.8% in March, after a big 2.1% gain in February and a 5.5% gain in January. In addition, the service trade data were stronger than expected, with the upside surprise in exports. Service exports rose a solid 1.8% in March, reversing downside surprises in the last few months.

Before the March report, the U.S. trade data appeared to reveal an accelerating pace of deterioration that kicked in with a surprisingly large gap in November of last year. But the March data reversed this pattern. The downtrend in the deficit since the start of 2002, when the U.S. dollar peaked and began moving lower against other major currencies, is quite linear, despite recent zig-zags.

SHOCK ABSORBER. The same is true for the export and import components. Exports have posted steady growth since the up-shift in GDP growth for the major U.S. trading partners in 2003. Imports also began to trend higher with the start of the U.S. expansion in 2002, and predictably accelerated alongside domestic GDP growth in the third quarter of 2003. Both patterns were predictable, given the growth pattern for global and U.S. GDP, and both trajectories have been remarkably linear.

Implicit in recent data is that the U.S. still faces a deteriorating trade position. But we aren't seeing any greater pace of deterioration in recent quarters, aside from the usual quarterly volatility. And to the extent that "soft patch" fears have merit, it's likely that slowing import growth will provide the usual shock absorber for U.S. GDP growth if domestic spending growth slows, since the import growth path would likely drop back to the 2003-04 pace if spending moderates.

As for the U.S. outlook for GDP growth, the current account deficit, and the soft-patch scenario: When we at Action Economics estimated a lean 3% first-quarter GDP gain just prior to the advance report of a 3.1% increase, our forecast reflected two factors. First, we adjusted our estimate at the last minute to incorporate the weak March durable goods data. Second, we believed that the Bureau of Economic Analysis would low-ball its trade and inventory assumptions for March in making its first GDP estimate for the first quarter.

SECOND-QUARTER STORY. Since then, the durables data have been revised upward, and the low-balled trade assumptions for March proved overly pessimistic. We now expect the same 3.8% GDP gain for the first quarter that we had estimated in the middle of the quarter, before the big negative "head fake" from the February trade report that was reversed in March. And the current account deficit is now poised to merely repeat the $187.9 billion gap reported in the previous quarter.

More generally, the soft-patch scenario is now back to being a second-quarter story. The 3.8% first-quarter GDP gain we now expect is negligibly different from the 4% average gains of the prior seven quarters. And the 3.5% second-quarter GDP gain that we forecast would leave only a modest shortfall from the overall trend that would need to be explained with higher gasoline prices and the associated soft patch. If gasoline prices sustain their most recent pullback, the GDP figures for the third quarter should stick pretty close to the 4% growth trend. Englund is chief economist for Action Economics

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