U.S. Trade Deficit Shrinks: Good or Bad?

Friday’s data showed that the US trade deficit unexpectedly narrowed in March, shrinking to $58.2 billion from $61.7 billion in February (initial estimate was $62.3 billion). This 5.7% decline was more than what most analysts had expected as they had predicted the gap would narrow to $61.3 billion. At first glance, this is good news for the US dollar as it shows that the deficit is narrowing and not ballooning. However, what caused the trade gap to narrow was not an increase in exports, but a sharp decrease in imports.

Imports into the US fell $6.1 billion to $206.7 billion, which was the biggest drop ever recorded. In terms of percentage, it was the biggest drop since December 2001. Not only was there lower demand for overseas products and goods, the weakening dollar also made those foreign goods more expensive to purchase. This big drop in imports only reinforces the overall view that American consumers are tightening their belts, choosing to spend their salary on basic necessities.

Import of autos, consumer goods, industrial supplies and capital goods all fell in March. US exports in March totaled $148.5 billion, the second highest amount ever recorded, but was a decline from February. Overseas buyers are finding US goods cheaper to buy due to their stronger domestic currencies relative to the weak dollar. While the narrowing trade gap may help the US dollar in the short-term due to less outflow of dollars, it doesn’t mean that the US economy wouldn’t slide into recession. Harvard University economist Martin Feldstein, who is also President of the National Bureau of Economic Research, said on Tuesday that the US economy is “sliding into a recession”.

Forex Trading

The US dollar has been trading with mixed results in the currency markets: it fell slightly against the Euro, Japanese yen and Swiss franc, but up versus the British pound. USD/CHF fell to an intraday low of 1.0390, while EUR/USD remains under 1.5500. USD/JPY fell to a 3-week low around 102.60.

Comments

[David888]

Can a recession be short-lived or does it have to last a year before we will see a recovery of the US economy and its dollar?

[Will Rahal]

I have just posted on how the trade deficits improves during recessions.
Other economic indicators also improve just as the economy is about to fall from a cliff.

The "improvement"... in the indicators provide investors with a false sense of security at exactly the wrong time.
See

wrahal.blogspot.com/20...

[Takayama]

Most analysts are forecasting an optimistic view with a short lived recession. Many investment houses are recommending stock purchase as the prices have all hit rock bottom and once in a lifetime buying opportunity.
This reminds me of my investment in the Japanese stock market.

This meltdown and the accompanied recession was a very painful experience for many Japanese. It was long and it never really recovered till this day.

Of course the Japanese were not as good as Americans in innovating schemes to fix their economic over indulgence. So a generation of Japanese have stay away from stocks and the likes, taking this painful chapter from the wisdom of their parents.

Therefore, be very wary and do not be too greedy ...