US Trade Deficit
Containers being unloaded at a dock. REUTERS

(Reuters) The U.S. trade deficit unexpectedly widened in February as exports hit a five-month low, suggesting first-quarter growth could be much weaker than initially anticipated.

Still, the economy is on track to regain momentum as the year progresses, with other data on Thursday showing a pick-up in the services sector in March after unusually cold weather hampered activity in the prior month.

The Commerce Department said the deficit on the trade balance increased 7.7 percent to $42.3 billion, the largest since September last year. The inflation-adjusted gap widened to $50.1 billion from $48.5 billion in January.

Economists who had expected the trade gap to narrow to $38.5 billion said trade could cut as much as half a percentage point from first-quarter gross domestic product. It added about a percentage point to fourth-quarter GDP.

"You are looking at a pretty soft first-quarter print," said Michelle Girard, chief economist at RBS in Stamford, Conn.

First-quarter growth estimates were already on the low side because of headwinds posed by harsh weather and businesses placing fewer orders with manufacturers after rapidly stocking up their warehouses in the second half of last year.

Growth has also been clipped by the end of long-term unemployment benefits and cuts to food stamps.

RBS slashed its first-quarter GDP estimate to an annualized rate of 0.6 percent from 1.2 percent.

Barclays lowered its estimate by three-tenths to a 1.9 percent rate, while Morgan Stanley also cut its forecast by the same margin to a 1.2 percent pace. The economy grew at a 2.6 percent rate in the fourth quarter.

Exports slipped 1.1 percent to $190.4 billion in February. That was the lowest level since September.


In a second report, the Institute for Supply Management said its services sector index rose to 53.1 in March from a reading of 51.6 in February, which was the lowest since February 2010.

A gauge of new orders rose for a third straight month and employment in the vast services sector rebounded after contracting in February.

"It adds support to the view that activity has been held back by unusually severe winter weather," said John Ryding, chief economist at RDQ Economics in New York. "This report suggests that economic activity picked up in March."

While a third report showed an increase in the number of Americans filing new claims for unemployment benefits last week, the underlying trend in the data continued to point to some strength in the labor market.

Initial claims for state unemployment benefits increased 16,000 to a seasonally adjusted 326,000, the Labor Department said. The four-week moving average for new claims, which irons out week-to-week volatility, hovered near six-month lows.

"It's broadly consistent with moderate growth in the jobs market," said Michael Hanson, a senior economist at Bank of America Merrill Lynch in New York.

Claims have been generally stable in March, supporting expectations of an acceleration in job growth during the month.

The government's closely watched employment report on Friday is expected to show nonfarm payrolls increased by 200,000 jobs last month after rising 175,000 in February, according to a Reuters survey of economists. The unemployment rate is seen falling one-tenth of a percentage point to 6.6 percent.

A report on Wednesday showed private employers stepped up hiring in March for a second straight month.

The labor market suffered a setback in December and January when unseasonably cold weather gripped large parts of the country. With temperatures rising, a pick-up is in the cards.

(Reporting By Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Andrea Ricci)