US Deficit “Mysteriously” Shrank in March

The nominal trade deficit, the headline number (which is not very informative) has been zigzagging about the -$45 billion mark for the past five years. The real trade in goods deficit (which is informative), has been widening since the second half of 2014, responding to the strong dollar and sluggish growth abroad.

Why did the deficit shrink so much in March? Mostly, it is a mystery to us. It might be that the March seasonal factors for imports are off. It could also be companies adjusting inventories. Whatever the reasons, the drop in imports and the shrinking deficit are one month events, likely to sort themselves out in next month’s report.

Real goods exports fell by $1.7 billion (chained 2009 dollars) returning to a downward trend that started in December 2014. Exports of services, as if immune to the effects of a strong dollar, climbed to its third highest level on record (data start in 1992.)

Real goods imports plunged by a whopping $7.4 billion (chained 2009 dollars), the largest one month drop since October 2008, when world trade was collapsing. The plunge is a headscratcher. Consumer imports took the brunt, dropping by a record $4.8 billion (chained 2009 dollars; data series starts in 1994), despite the fact that consumer spending, which drives imports of consumer goods, registered satisfactory gains in March.

“Trade was a drag on growth in five of the last six quarters, including the last three,” says IHS Global Insight US Economist Patrick Newport. ” It will remain a drag for at least the next two years, reducing quarterly growth rates by small amounts over a long period of time.”

Newport concludes by noting that this type of drag is preferable to one that slashes growth by a large amount over a short period because labor markets in the US adjust quickly to demand shifts.

“That is why the strong dollar has slowed growth but not job creation,” he says.

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