U.S. Economy: Trade Deficit Narrows Less Than Forecast

The U.S. trade deficit narrowed less than forecast in February, indicating soaring commodity prices hurt the world’s largest economy at the start of the year.

The gap shrank 2.6 percent to $45.8 billion from a larger- than-previously-estimated $47 billion in January, according to figures from the Commerce Department today in Washington. Another report showed the cost of imported goods jumped in March by the most in almost two years.

Economists at Morgan Stanley and Barclays Capital Inc. were among those cutting estimates for first-quarter growth after the data showed exports dropped along with imports, failing to make up for a slowing in consumer spending. The earthquake and tsunami in Japan may further reduce trade in coming months after parts shortages caused some factories to close.

“Everything was weaker across the board,” Ted Wieseman, an economist at Morgan Stanley in New York, said, referring to the trade data. “Import prices are reflecting surging energy prices,” he said, they “are going through the roof and that has been weighing on consumer spending.”

Prices of imported goods rose in March at the fastest pace since June 2009, led by a gain in crude oil and the biggest jump in food costs since 1994, according to figures from the Labor Department. The 2.7 percent increase in the import-price index followed a 1.4 percent rise in February. Costs excluding fuel rose 0.6 percent.

Federal Reserve Vice Chairman Janet Yellen is among policy makers saying the increase in food and fuel costs will have only a temporary impact on inflation and consumer spending and warrants no reversal of record monetary stimulus.

Yellen on Prices

“The surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply,” Yellen said yesterday in a speech in New York. “These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy.”

Stocks dropped as sales at Alcoa Inc. missed analyst estimates and Tokyo Electric Power Co. said its earthquake-hit nuclear power plant may release more radiation than Chernobyl. The Standard & Poor’s 500 Index fell 0.8 percent to 1,314.16 at the 4 p.m. close in New York. Oil fell, capping the biggest two- day drop in almost 11 months on the outlook for growth.

Projected Drop

The median forecast of 71 economists surveyed by Bloomberg News projected the trade gap would shrink to $44 billion. Estimates ranged from deficits of $41 billion to $50.5 billion. The Commerce Department had previously estimated the January shortfall at $46.3 billion.

Morgan Stanley lowered its tracking estimate for gross domestic product in the first three months of the year to a 1.5 percent annual pace from a 1.9 percent forecast prior to the data. Barclays Capital in New York lowered it to a range of 1.5 percent to 2 percent, down a half point. GDP climbed at a 3.1 percent pace in the last three months of 2010.

After eliminating the influence of prices, which renders the figures used to calculate GDP, the trade deficit narrowed to $49.5 billion from $50.3 billion. The figures exceeded the fourth-quarter average of $45.3 billion.

Exports decreased 1.4 percent to $165.1 billion after climbing 2.6 percent in January to a record $167.5 billion. Decreased demand for autos and parts and for capital goods like semiconductors and engines contributed to the drop.

Imports Fall

Imports fell 1.7 percent to $210.9 billion after climbing 5.4 percent in January, the biggest gain since 1993. Decreasing demand for autos and petroleum products led the decline.

An early Chinese New Year may have contributed to the volatility in trade this year. Chinese manufacturers typically run flat-out prior to the holiday then shut down for at least a week, according to Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York. The Year of the Rabbit was celebrated on Feb. 3, slightly earlier than the average timing.

The trade gap with China slumped to $18.8 billion from $23.3 billion the prior month.

A 6 percent drop in the value of the dollar in the year to April 8 against a weighted basket of currencies from the country’s biggest trading partners is making American-made goods cheaper for buyers abroad. Combined with growth in emerging economies, the decrease will probably lift exports later this year and benefit manufacturers like Caterpillar Inc. (CAT)

Business ‘Booming’

Caterpillar, the world’s largest maker of construction equipment, is seeing a “slow, steady increase” in demand in North America, Chief Executive Officer Doug Oberhelman said at an industry conference on March 23. “Business is booming outside the U.S.”

The world economy will expand 4.4 percent this year and 4.5 percent in 2012, the Washington-based International Monetary Fund said yesterday in its World Economic Outlook report. Developing nations will grow 6.5 percent this year and next while advanced economies will expand 2.4 percent in 2011 and 2.6 percent in 2012, the IMF said.

The earthquake and tsunami in Japan may hamper trade flows as parts shortages shutter factories.

“We’re going to have some headwinds in the first half of the year, given the Japan situation, though we do expect trade to pick back up,” said Omair Sharif, an economist at RBS Securities Inc. in Stamford, Connecticut. “We’re going to have some disruptions in the supply chain, especially in the auto side, with all the news coming out of Japan.”

Crude Oil

Amid stronger global growth and turmoil in the Middle East, commodity costs are on the rise. The average price of a barrel of imported crude oil climbed to $87.17 in February, today’s trade figures showed, the highest since October 2008. Americans responded to the increase by importing 242 million barrels in February, the fewest in 12 years.

Increases in food and fuel costs have hurt consumer spending, which accounts for about 70 percent of the economy. Household purchases probably climbed at a 2 percent annual pace in the first quarter, half the 4 percent gain in the previous three months, according to the median forecast of economists surveyed by Bloomberg earlier this month.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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