Why the Shrinking Trade Deficit Signals Good Things About the U.S. Economy

Economists are more upbeat about first-quarter U.S. gross domestic product after Wednesday’s report showing the trade deficit unexpectedly narrowed in February, reducing the chances that growth slowed from the prior period.

JPMorgan Chase & Co. economists raised their GDP forecast following the report to about a 2.5 percent annualized growth pace in the first quarter from 2 percent. Goldman Sachs Group Inc. forecasters boosted their tracking estimate to 2.1 percent from 1.7 percent and said they now expect a positive contribution from net trade to GDP growth, while the Federal Reserve Bank of Atlanta’s GDPNow model estimate increased to 2.4 percent.

The Commerce Department will release first-quarter GDP figures on April 26. Growth was 2.2 percent in the final three months of 2018.

The U.S. trade deficit in goods and services unexpectedly narrowed to an eight-month low in February, declining to $49.4 billion from $51.1 billion on a 1.1 percent rise in exports and a 0.2 percent increase in imports. That suggests net exports will make a positive contribution to gross domestic product in early 2019 after causing a drag for the prior two quarters.

What Bloomberg’s Economists Say

“A narrower trade deficit in the first quarter will help lessen the sting of what is likely to be a weak quarterly GDP result… Analysts should treat the narrowing as a transitory development.”– Carl Riccadonna and Yelena Shulyatyeva, economists Click here for the full note.

“This better-than-expected trade situation creates a really good platform for first quarter GDP growth,” ING Groep NV Chief International Economist James Knightley wrote in a report. “Today’s trade figures mean 2.5 percent is looking achievable.”

Jim O’Sullivan of High Frequency Economics and Michael Pearce of Capital Economics saw the trade report as potentially pushing first-quarter GDP up as much as 1 percentage point.

The brighter outlooks follow an April 5-10 Bloomberg News survey showing the median estimate for first-quarter expansion increased to 1.6 percent from 1.5 percent seen last month. The projections reflect forces such as slower imports and higher-than-expected inventory accumulation, which could weigh on growth later this year.