US trade deficit plunge may ease economic slide

April 10, 2009
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, WASHINGTON, Apr 10 – A plunge in the US trade deficit to a nine-year low on the back of falling imports may cushion the contraction of the world\’s largest economy but the pain may be passed to the rest of the world, analysts say.

The deficit contracted for the seventh consecutive month by a more than expected 28.3 percent to 26 billion dollars in February on a big recession-driven fall in imports and an unexpected rebound in exports, the Commerce Department said Thursday.

It was the biggest drop in more than 12 years, with the deficit at its lowest level since November 1999, surprising most analysts who had expected the gap to shrink just to 36.5 billion dollars.

"The trade deficit is disappearing faster than a speeding bullet and that bodes well for growth," said Joel Naroff, chief economist with Naroff Economic Advisors.

He expected the narrowing deficit to have eased the economic contraction in the first quarter of 2009 after the negative 6.3 percent growth posted in the last quarter of 2008.

Other analysts also want to trim their growth contraction projections — some had earlier predicted an eight percent decline in gross domestic product (GDP) — ahead of the government announcement of its initial estimate of first-quarter GDP on April 29.

"We had expected trade to be a neutral factor on growth, but using even conservative assumptions for March suggests a significant positive contribution from trade," said economist Julia Coronado of Barclays Capital Research.

The latest trade data "suggests notable upside risk to our forecast for a contraction of 5.5 percent in first quarter GDP," she said.

Analysts had mostly looked at improved auto sales, consumer confidence, and factory data as emerging signs that some areas of the economy have hit bottom.

"We had previously expected real net trade to subtract around half of a percent from first quarter GDP. Now it appears trade could add close to a full percent," said Aaron Smith, senior economist for Moody\’s Economy.com

A boost from the trade components will also help offset a plunge in business investment and "it now looks like real GDP might be down at \’only\’ about a two percent annual rate," said Patrick O\’Hare of Briefing.com.

But the statistical benefit to US GDP should not be overemphasized as trade remains on a serious slide that is hurting economies around the world, he said.

With global economies contracting as quickly as the United States, US exports will continue to struggle, Smith said.

More importantly, as the domestic inventory adjustment winds down this quarter, imports should contract more slowly, she added.

Reeling from a recession since December 2007, the United States has reduced its trade deficit by more than half since July last year, the latest data showed.

Exports sprang back in February after six months of decline while imports continued to fall for the seventh consecutive month.

The smaller import volumes in the trade data also reflected lower spending by US businesses on capital equipment, a major inventory adjustment by US purchasers and lower consumer spending.

"The import decline shows how the US is passing on its demand weakness to the rest of the world," IHS Global Insight chief US economist Nigel Gault said.

He cited the sharp fall in US trade deficits with major exporters like China, Germany and Japan over the past 12 months amid weakening US import demand.

The politically sensitive deficit with China, for example, fell to its lowest level since February 2006 — to 14.2 billion dollars from 20.6 billion dollars in January.

Exports to China increased to 4.7 billion dollars while imports decreased to 18.9 billion dollars.

"Our limited exports held up but we bought nearly 25 percent less of Chinese goods. That is not good news for the Chinese economy," Noroff said.

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