Thursday, April 12, 2012
Are US import numbers the canary in the coal mine?
A much better than expected reading for the US February balance of trade (-$46 bln vs. expectations of -$51.8 bln) caused some economists to revise their Q1 GDP forecasts higher. Barclays is now calling for a 2.7% growth rate, up from its earlier estimate of 2.5%.
We all know that the trade balance factors into the "Net Export" component of GDP, which is normally a subtraction because it's perennially negative. In this case a smaller negative number would actually end up "adding" to GDP in that it takes less away. (Got that?)
But the quick decision to upgrade Q1 forecasts may be short-sighted. That's because the improvement in February's trade balance came mostly from a sharp decline in imports, which fell by $6.3 bln. Exports on the other hand, rose by only $0.2 bln.
A fall in imports speaks to softening demand, which is something the economy has been struggling with for a while now. In fact the data shows that demand, at least as measured by imports, is falling rapidly. (See chart below.)
Net exports are the smallest component of GDP, so any improvement here has only a limited impact on overall GDP, but if the demand fall-off shows up in any of the bigger components like Personal Consumption Expenditures or Business Investment, then the gains from trade would be completely offest. The import numbers may well be the canary in the coal mine.