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Trade gap puts dent into Q1 growth
May 10, 2007 / 5:47 PM / 10 years ago

Trade gap puts dent into Q1 growth

<p>A crane unloads a container from a train onto a truck at the Logistics Park Chicago Intermodal hub of the U.S. railroad Burlington Northern Santa Fe April 12, 2006 in Chicago. The economy took in far more goods than it sold overseas in March and that put a big dent into economic growth during the first three months of this year. REUTERS/Nick Carey</p>

NEW YORK (Reuters) - The economy took in far more goods than it sold overseas in March and that put a big dent into economic growth during the first three months of this year.

The government’s lackluster 1.3 percent annual gross domestic product growth rate in the first quarter could now be revised down to as low as 0.5 percent by some analysts’ estimates. Most economists are nearly certain growth will come in below one percent.

These darker forecasts come after the government reported on Thursday that the U.S. trade gap widened by more than 10 percent to $63.89 billion, mostly on a surge in oil prices.

The March trade gap was bigger than analysts were expecting and it is the last key piece of the puzzle needed to measure the economy’s performance during the first three months of this year.

“I don’t see anything out there that would improve the U.S. trade imbalance,” said Alan Tonelson, a research fellow at the U.S. Business and Industry Council in Washington.

Relatively low interest rates and a U.S. dollar that has dropped by about 30 percent since its peak in early 2002 are factors that would normally boost economic growth, but in recent quarters that has not happened.

“As long as we keep buying so much more from the rest of the world than we sell to them, the benefits of that stimulus will keep leaking overseas,” Tonelson warned.

In the trade report, a rise in oil prices accounted for 45 percent of the 4.5 percent surge in imports. Imports of vehicles and other consumer goods were also strong in the report.

That eclipsed the 1.8 percent advance in exports during the month.

An ever-rising trade imbalance will likely curb economic growth by, among other things, cutting into U.S. job creation and ultimately consumer spending, some analysts warn.

“Each dollar spent on imports, not matched by a dollar of exports, shifts workers into activities where productivity is lower and reduces domestic demand and employment,” said Peter Morici, economist and professor at the University of Maryland’s School of Business.

He noted that productivity runs at least 50 percent higher in industries that export and compete with imports.

“By suppressing wages and benefits, the trade deficit has pushed down the percentage of adults participating in the labor force,” Morici added.

Thus far the labor market has remained relatively strong, and the number of workers lining up for unemployment benefits has been declining in recent weeks.


Consumer spending -- which accounts for 70 percent of economic growth -- has also held steady. But economists warn that may change in coming months and will cut into GDP growth.

Economists estimate that consumer spending growth, adjusted for inflation, will likely fall back from about 3.8 percent in the first quarter to as low as 1.5 percent in the second quarter.

“Their contribution is going to drop significantly,” said John Lonski, chief economist at Moody‘s.

Rising gasoline prices are indeed expected to cut into consumer purchasing power. Economists are expecting retail sales in April to show a 0.4 percent gain after a 0.7 percent rise in March, and most of that reflects higher energy prices.

Still, business spending is likely to pick up and that will lead to better growth later in the year.

“The wider trade gap in March was the result of strong import growth which may be a sign of a pickup in domestic demand toward the end of the first quarter,” Bear Stearns wrote in a research report.

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