Recession Watch: Mixed Signals

Unemployment claims fell dramatically, but the trade deficit widened by a greater than expected amount

By BusinessWeek, Standard & Poor's, and Action Economics staff

Two reports released Apr. 10 presented some mixed signals on the U.S. economy. On the plus side, the number of Americans filing first-time claims for unemployment fell dramatically in the week ended Apr. 5 after a dramatic spike the week before. But that news was countered by a report showing the U.S. trade deficit had widened by a greater than expected amount in February.

"While the better than expected initial claims reading may help calm recession fears, the disappointing trade report will give markets something else to worry about," wrote S&P economist Beth Ann Bovino in an Apr. 10 note.

Here's a look at the Apr. 10 reports:

Initial Jobless Claims

Initial jobless claims for the week ending Apr. 5 fell 53,000, to 357,000, pulling back from the prior week's 410,000 reading (revised from 407,000 initially). Markets expected claims to come in at 385,000. The four-week average rose 2,500, to 378,250, the highest level since October, 2005. Continuing jobless claims rose 3,000 to 2,937,000 for the week ending Mar. 29, the highest since July, 2004. The insured unemployment rate held at 2.2%.

"The massive 53,000 drop in the first week of April more than reversed the 41,000 late March surge to suggest that seasonal distortions from Easter are fully to blame for the swings," according to Action Economics. "Claims are still likely trending upward, but at a rate that is again undershooting the deteriorating trend in payrolls." Action is keeping its April nonfarm payroll estimate at -60,000, which would reflect a slight moderation from the 76,000-to-80,000 declines seen in each of the months of the first quarter.

Trade Balance

The U.S. trade deficit widened to $62.3 billion in February, from $59.0 billion in January. The market had expected the deficit to narrow to $57.7 billion. Although oil imports dropped $2.0 billion, as expected, this was offset by a sharp increase of $7.2 billion in non-oil imports.

Exports were up $3.0 billion, to $151.4 billion, while imports jumped $6.3 billion, to $213.7 billion. Exports were led by a $1.9 billion rise in industrial supplies and materials. The import surge was from consumer goods (up $2.2 billion), automotive (up $1.8 billion), and capital goods (up $1.0 billion). Oil prices rose, but the volume of imported oil fell in February.

The trade deficit with China narrowed to $18.4 billion in February, but China accounts for 30% of the year-to-date gap. "The wider trade gap is a clear negative for both first-quarter growth and the dollar," said Bovino.

The trade report revealed surprisingly robust import figures for February that overshot an otherwise impressive set of export gains, according to Action Economics. Action lowered its first-quarter U.S. gross domestic product estimate to 0.3%, but raised its second-quarter GDP estimate to -0.5%.

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