Trade: A Belated Yearend Surprise
By Michael Englund and Rick MacDonald
After a record U.S. trade deficit in November, the markets were ready for some better news for December -- and they got it: A Commerce Dept. report released Feb. 10 showed the gap narrowing to $56.4 billion in the final month of the year, from a revised $59.3 billion in November that was reported at $60.3 billion previously (see BW Online, 1/13/05, "A Rising Trade Gap Sinks Growth").
As anticipated, the better-than-expected headline deficit data -- and a drop in initial jobless claims to their lowest level in more than four years -- gave traders an excuse to push Treasury yields higher. The two sets of benign figures also helped to firm the U.S. dollar.
ERRORS THAT "PILED ON."
The size of the trade gap itself was remarkably close to Wall Street expectations, though both exports and imports of goods were considerably stronger than expected for the month. Exports rebounded 3.2% in December, after dropping a revised 0.9% in November (down 2.3% previously), led by gains in capital goods, industrial supplies, and consumer goods. Imports rose a surprising 0.1%, following a 1.6% gain in November, with weakness led, as expected, by a petroleum-related decline in industrial supplies.
The upward adjustment in the November export figures reflects a data error in the November Canadian trade balance data released by Statistics Canada. This resulted in an $8 billion addition to the U.S. export total, as well as general upward revisions to the historic export data in response to annual adjustments always made with the December report.
The U.S. trade data signaled the expected $10 billion upward adjustment we at Action Economics project for net exports in the next fourth-quarter gross domestic product report. The Commerce Dept. significantly underestimated trade growth in the fourth quarter -- to the tune of $2 billion. That's apart from the Canada data error, which essentially "piled on."
EXPECTED GDP BOOST.
But it appears that both exports and imports of merchandise will be revised upward by greater-than-expected amounts. We predict a huge $16 billion upward bump in exports, alongside a $6 billion "tweak" up in imports. This will reverse the 3.9% drop in exports in the fourth quarter, to leave a positive 1.7% growth rate. Import expansion should be boosted from 9.1% to a 10.6% fourth-quarter rate. The data imply the U.S. is entering the first quarter with a decidedly strong tone for both exports and imports, but with a deficit outlook that's similar to what we held before.
What are the implications for U.S. economic growth? At Action Economics, we now estimate a 3.6% fourth-quarter gain in GDP, vs. the initial 3.1% figure, and it appears that the trade figures entered the first quarter with an encouraging trajectory.
Englund is chief economist, and MacDonald is global director of investment research and analysis for Action Economics