First Quarter GDP Likely Negative as Trade Deficit Soars

Because of the blinkered way we talk about the economy in this country, news that the trade deficit widened in March well above consensus expectations will undoubtedly be met by cries that we must create more free trade deals to counteract that. Of course, the two have almost nothing to do with one another. In fact, what we’re likely seeing is that a strong dollar policy – usually promoted by the same officials who endorse free trade agreements – is significantly undermining our economic health.

First, to the numbers. Everything went up in March – imports, exports and the trade deficit – because of the impact of the resolution of the West Coast port strike. Goods flowed and a large backlog got worked through. The result was the worst monthly trade deficit in six years, but even the three-month rolling average increased around five percent relative to one year ago.

Fortunately, Administration officials are magicians that don’t count imports in trade statistics, so this was welcomed as good news. I have a press release from Commerce Secretary Penny Pritzker that begins, “Today’s data shows that despite challenges facing economies around the globe, the world wants what America is selling.” Really. She cited the 0.9 increase in exports and neglected the far faster increase in imports. Talking about trade while only talking about exports is like a sportscaster giving a score for only one team in a baseball game. “Today, Dodgers 4.”

The officialdom, on the other hand, seems not to know what to make of this development:

JPMorgan Chase economist Daniel Silver wrote to clients that “we do not know” if the weakness of exports is port-related, “or if the recent weakness in the data is mainly due to the stronger dollar.” 

Other economists put the blame mainly on the port disruptions […] “Yes, the stronger dollar is playing a role here, but currency shifts simply don’t feed through into real trade flows that fast and that dramatically,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a client note. What he meant is that it takes time for people to change their buying patterns after a shift in exchange rates. 

“That said,” Barclays Capital economist Jesse Hurwitz wrote, “we do expect the net trade balance to drag on overall growth over the next several quarters.” That’s partly because Americans are consuming more and partly because of the stronger dollar, he said.

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