When the first estimate of Q1 GDP was released we wrote: “Given the impact from higher oil and gas prices on the economy, which is a real and pervasive tax on the consumer as discussed recently, it is highly likely that we will see downward revisions to Q1 GDP in the next two months.” Today’s release of the trade data confirms this will be likely.
The U.S. trade deficit widened much more than expected in March as imports surged to a record high. This is a negative to the GDP calculation which takes into account net exports (exports minus imports) as part of the calculation. Furthermore, the trade gap grew 14.1 percent to $51.8 billion which is the biggest jump within a year.
The bigger-than-expected rise follows government data on Wednesday that showed wholesale inventories grew less than expected in March. This data supports our expectations that 1st quarter GDP will come in somewhere between 1.25 and 1.75 percent annual growth rate by the time we see the final revisions. This is far weaker than current analyst expectations and will be the clarion call for more “QE” from the Fed.
U.S. imports jumped 5.2 percent in March, the biggest gain since January 2011, to $238.6 billion. The increase in imports corresponds with the recent surge in consumer credit, borrowed dollars are going somewhere, as increases were seen in both goods and services. This surge in imports also supports the recent reports on German manufacturing which was supported almost entirely by orders outside the Eurozone.
We stated in our first look at GDP that the impact of higher oil prices and a lower dollar would be a negative to the future revisions. Average prices for imported oil pushed to $107.95 per barrel and the dollar declined slightly from the beginning of the year increasing pressures. These are clear negatives to the upcoming revisions of GDP.
On the domestic front U.S. exports also rose by 2.9 percent to $186.8 billion. However, in a sign of concern for the U.S. manufacturers, the rate of growth in exports continues to deteriorate along with prices received. This does not bode well for continued earnings’ growth as margin pressures remain a concern. The chart shows export prices less import prices. The declines in net export prices erodes corporate profitability and eventually affects the market and the economy. While the economy has was able to fend off these pressures before the last recession due to the credit and real estate boom – today that defense comes from continued injections of stimulus from the Fed. However, the pervasive disparity in net prices is one of the reasons there continues to be diminished returns from each round of stimulus.
The indications are that the economy is weaker than the current headlines suggest and in the coming months we are likely to see continued reversals in the overall macroeconomic data. This, of course, will provide the Fed with the much needed ammunition to launch additional stimulative programs to bolster the economy in the short run but the long term effects continue to appear to be deleterious.