Thursday, May 10, 2007

Trade Deficit Expands; May Drag 1Q Growth Down

From CBS MarketWatch:

The U.S. trade deficit widened sharply in March after having improved somewhat over the past six months, a government report showed Thursday.

The report shows that trade will be a bigger drag on first-quarter growth than previously estimated.

The nation's trade deficit widened by 10.4% in March to $63.9 billion, its highest level since last September, the Commerce Department said. It marked the largest increase in the deficit since September 2005.


Economists said that after accounting for the March trade and inventory data, first-quarter growth would be cut to a slim 0.5%-to-0.8% range. This would be the weakest since the fourth quarter of 2002.

Just what the economy needs right now -- a reason to lower the 1.3% growth rate in the first quarter.

On the issue of oil imports, the San Francisco Federal Reserve did a study of the relationship between oil imports and the trade deficit. Here is their conclusion:

Oil prices have almost quadrupled since the beginning of 2002. For an oil-importing country like the U.S., this has substantially increased the cost of petroleum imports. International trade data suggest that this increase has exacerbated the deterioration of the U.S. trade deficit, especially since the second half of 2004. One factor can explain this evolution: The real volume of U.S. petroleum imports has remained essentially constant. One explanation for why the demand for petroleum imports has not declined in response to higher prices comes from a model in which firms are fairly limited in their ability to adjust their use of energy sources, such as oil, in the short term.

I've highlighted this report several times because its conclusion is really important: so long as the US is an oil importer, the trade deficit probably won't go away.