The US trade deficit narrowed considerably in February – from $42.7bn to $35.4bn – and this will be mostly reversed in March. The deficit has been significantly impacted by the West Coast ports shutdown, which probably caused the large narrowing in Februaryand could also be responsible for the more modest narrowing in January. The March forecast of -$42.5bn would essentially bring the deficit back to January levels. In its advance estimate of Q1 GDP, the BEA assumed a more significant widening to $45.2, which resulted in a negative contribution of 1.25%. This came on the back of a 1.0% drag in Q4. To the extent that these are driven by the dollar’s strength, the drag has been more pronounced than anticipated. Macroeconomic models suggest that a 15% appreciation in the USD should shave about 0.5% from growth in the four quarters following the shock. In this context, the drag from trade reported during the Q4-Q1 span seems overdone. One potential explanation is that the sensitivity to dollar’s movements has increased dramatically in the post-crisis world; alternatively, the drag may have been front loaded and will diminish greatly going forward. We are leaning toward the latter explanation. A third explanation is that the BEA assumed too significant a drag from trade in Q1. According to Societe Generale, the reported figures imply a March deficit of -$45.2bn, about $2.5bn than the forecast. If projection comes to fruition, it would imply a modest upward revision to the reported Q1 GDP figure of 0.2%.
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