U.S. Trade Deficit Narrows, But Not Enough to Help GDP

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Trade Gap
Tony Dejak/AP
By Lucia Mutikani

WASHINGTON -- The U.S. trade deficit narrowed in March as exports rebounded, but the improvement probably wasn't enough to prevent the government from revising down its estimate of first-quarter growth to show a contraction.

The Commerce Department said Tuesday the trade gap shrank 3.6 percent to $40.4 billion, broadly in line with economists' expectations. When adjusted for inflation, the deficit dipped to $49.4 billion from $49.8 billion in February.

March's shortfall, however, was a bit bigger than the $38.9 billion that the government had assumed in its advance first-quarter gross domestic product estimate published last week.

Economists said the data implied about a two-tenths of a percentage point reduction to the first quarter's 0.1 percent annual growth pace. The report came on the heels of March construction spending and factory inventories data that also proved weaker than the government had assumed in its advance GDP report last Wednesday.

"There is a very high chance that GDP will be revised to show a contraction in the first quarter, possibly in the neighborhood of minus 0.5 percent," said John Ryding, chief economist at RDQ Economics in New York.

That would be the first quarterly contraction in three years.

The government will publish revised GDP figures later this month. In its initial report, it estimated trade subtracted 0.83 percentage point from economic growth, with exports posting their largest quarterly decline in five years.

Exports Boost Growth Outlook

The increase in exports in March, however, was the latest sign to suggest the economy had momentum at the end of the quarter. Exports increased 2.1 percent to $193.9 billion in March, the highest level since November.

"The strong finish to the last quarter points to further improvement in the trade balance in the coming months if this positive momentum is sustained," said Millan Mulraine, deputy chief economist at TD Securities in New York.

%VIRTUAL-article-sponsoredlinks%Exports of capital goods, industrial supplies and materials, and automobiles increased in March. Exports of services hit a record high, while those of non-petroleum goods were also the highest on record. Exports to Canada, South Korea and Germany all touched all-time highs in March.

A slow pace of restocking by businesses as they worked through an inventory glut accumulated in the second half of 2013 had restrained imports in recent months, but that impact appeared to fade in March.

Imports rose 1.1 percent to $234.3 billion in March, the highest level in two years, in part reflecting a rise in the price of petroleum. Imports excluding petroleum increased 2.8 percent, a sign of rising domestic demand.

In March, imports of food and non-petroleum products hit record highs.

The politically sensitive trade gap with China narrowed a bit as exports of goods and services increased 9.6 percent, while imports advanced only 1.6 percent.

-Additional reporting by Richard Leong in New York.

U.S. Trade Deficit Narrows, But Not Enough to Help GDP
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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