Trade Data Point to First-Quarter Economic Contraction

Trade Gap
Elaine Thompson/APThe Space Needle towers in the background beyond a container ship anchored in Elliott Bay near downtown Seattle.
By Lucia Mutikani

WASHINGTON -- A surge in imports lifted the U.S. trade deficit in March to its highest level in nearly 6½ years, suggesting the economy contracted in the first quarter.

Growth, however, is regaining momentum as other data Tuesday showed activity in the services sector, which accounts for more than two-thirds of the economy, accelerated to a five-month high in April.

"It looks like we are going to have negative GDP for the first quarter, just based on trade, but we expect a robust rebound in the second quarter. A lot of the headwinds we saw in the first quarter have unwound," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.

The Commerce Department said the trade deficit jumped 43.1 percent to $51.4 billion in March, the largest since October 2008. The percent rise was the biggest since December 1996. The surge came as imports snapped back after being held down by a now-settled labor dispute at key West Coast ports.

U.S. Trade Balance
Economists had forecast the trade deficit rising to only $41.2 billion. When adjusted for inflation, the gap widened to $67.2 billion in March, the largest in eight years, from $51.2 billion in February.

U.S. stocks and Treasury debt prices were trading lower. The dollar fell against a basket of currencies.

March's trade gap was far larger than the $45.2 billion deficit the government assumed in its snapshot of first-quarter gross domestic product last week.

In that report, the government estimated trade sliced off 1.25 percentage points from GDP, helping to pull down growth to a 0.2 percent annual pace. The economy expanded at a 2.2 percent rate in the fourth quarter.

Economists said growth could be lowered by at least six-tenths of a percentage point when the government publishes its second GDP estimate later this month.

No Serious Downturn

The West Coast ports labor dispute, a strong dollar, deep spending cuts by energy companies reeling from lower oil prices, and bad weather hampered growth in the first quarter. But some of that drag on growth is fading.

In a separate report, the Institute for Supply Management said its services sector index rose to 57.8 last month, the highest since November, from 56.5 in March. A reading above 50 indicates expansion in the vast services sector.

%VIRTUAL-pullquote-There is little reason to believe that the potential contraction in first-quarter GDP is the start of a serious downturn in the U.S. economy.%"There is little reason to believe that the potential contraction in first-quarter GDP is the start of a serious downturn in the U.S. economy," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Companies reported an increase in new orders and order backlogs. Export orders, however, contracted sharply, reflecting the dollar's impact. The greenback has gained about 12 percent against the currencies of the United States' main trading partners since last June, making American goods and services less competitive on the international market.

The trade report showed imports jumping 7.7 percent in March, the largest increase on record.

Some of the imported goods likely ended up as inventories, which in the first quarter recorded their biggest increase since the third quarter of 2010. That inventory overhang could spell bad news for second-quarter GDP.

Imports of capital and consumer goods were the highest on record in March, while imports of industrial supplies and materials slumped to an all-time low.

Imports of petroleum products hit a record low, highlighting lower crude oil prices and increased energy production in the United States, which has reduced its dependence on foreign oil.

The average import price for crude oil was $46.47 a barrel in March, the lowest in six years.

Exports increased 0.9 percent in March. Petroleum exports were the lowest since February 2011. Exports to the European Union rose 8.6 percent, with those to Germany reaching their highest level since October 2008.

The United States sold the fewest amount of goods and services to Brazil since April 2010. Exports to Canada and Mexico, the main U.S. trading partners, were up in March.

Exports to China increased 13.6 percent, while imports from that country jumped 31.6 percent. That left the politically sensitive U.S.-China trade deficit at $31.2 billion, up 38.6 percent from February.

The U.S. trade deficit with Japan was the largest in two years.

9 Numbers That'll Tell You How the Economy's Really Doing
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Trade Data Point to First-Quarter Economic Contraction
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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