No Escaping the Trade Gap's Math
By Michael Englund and Rick MacDonald
In February, the U.S. trade deficit soared to a record $61 billion, with a flat export figure and a 1.6% increase in imports. Strength in petroleum imports, which surged 1.8%, led the gain, although rises were also seen in consumer-goods imports, alongside widespread restraint in exports for that category.
The huge gap in February has pretty much locked in weakness in the overall trade figures for the first quarter after an unusually poor fourth-quarter performance in 2004. Much of the strength in imports and restraint in exports likely reflects robust growth in aggregate demand in the U.S. alongside diminished growth in Europe, Japan, and Canada. The back-to-back softness in the fourth- and first-quarter trade figures signals that limp trade will probably linger through 2005, even as the U.S. dollar continues to trend lower than other major currencies.
The February report confirms that the U.S. trade deficit deterioration has kicked into high gear over the past two quarters, with a troublesome slowing in export growth alongside soaring imports. The figures will provide a sizable drag on U.S. gross domestic product (GDP) growth in the first quarter.
The monthly trade deficit figures actually started to reveal a more aggressive rate of worsening back in June, 2004, when a sharp drop in the gap, to $55.4 billion, appeared to reflect the temporary impact of a blip in oil prices, alongside an ill-timed drop in exports. In the ensuing eight months, however, the deficit has provided numerous surprises, and nearly all in the direction of a wider gap.
The deficit's rapid rise reflects a unexpected acceleration in imports alongside a cyclical rebound in exports that is weaker than seen in past cycles. Indeed, post-1999, imports appear to have made a secular acceleration that has gained even more steam since mid-2004, while exports have exhibited a surprisingly sluggish growth path since the Asian financial crisis in 1997.
The data imply that first-quarter net exports will provide another huge GDP drag -- close to the hefty $38 billion subtraction in the fourth quarter. We at Action Economics have revised our first-quarter estimate for GDP growth down to 3.8%.
And we think the data suggest that the current-account deficit will reach a new record in the first quarter, of around $194 billion -- some 6.4% of GDP. Despite strong GDP growth, the downtrend in this measure has been particularly brisk over the past year.
In total, the U.S. is experiencing a more rapid underlying growth path for imports over the past year than we had expected -- despite rising petroleum prices. And exports aren't accelerating as much as we have seen in past global expansions. China is playing a big role in the widening U.S. trade gap, although this isn't attributable to the recent changes in apparel tariff laws. This less-encouraging-than-expected trend is bad news for both U.S. GDP growth and for the dollar.
Englund is chief economist, and MacDonald global director of investment research and analysis, for Action Economics
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