Can the Economy Improve in 2012?
Can the Economy Improve in 2012? Reuters

An unexpected drop in the US trade deficit in February has prompted analysts to raise the first quarter GDP growth estimates.

Net trade wasn't as large a drag on GDP growth in the first quarter as previously looked likely. Annualized first-quarter GDP growth may have been nearer to 2.5 percent than our previous estimate of 2.0 percent, Paul Dales, senior US economist at Capital Economics, said.

The sharp narrowing in the trade deficit, to $46.0 billion in February from $52.5 billion in January, was due partly to a fall in the value of oil imports triggered by a drop in the number of barrels being imported. But the non-petroleum deficit also narrowed to $18.2 billion from $22.9 billion.

Imports recorded a $6.3-billion in February while exports gain was limited to a mere $240 million.

The real goods deficit shrank to $44.1 billion in February from $49.1 billion. This was due to a 1.0 percent fall in real exports and a 3.9 percent decline in real imports.

In the first quarter as a whole, imports may have risen at an annualized rate of close to 5 percent. That would be roughly half the increase that previously looked likely, suggesting that net trade was a smaller drag on GDP growth, Capital Economics said in a note to clients.

It is reported that producer prices were unchanged in March, suggesting that pipeline price pressures remained fairly subdued.

On the surface, a sharp decline in imports raises concerns about domestic consumer and business spending. But other indicators in February and March suggest that domestic demand is strengthening.

Analysts say the decline in imports was almost certainly owing to supply-related reasons.

The Chinese lunar New Year, which spilled into early February this year, idled Chinese factories that produce goods for U.S. markets. As the Chinese holiday does not typically fall in February, the seasonal factor does not adjust for it, Paul Edelstein, IHS Global Insight's financial economics director, said.

Exports were down in segments like food (4.7 percent), industrial supplies (0.1 percent) and automotive (6.4 percent) goods. Exports of consumer goods increased 2.1 percent while exports of capital goods were flat. The sharp drop in automotive exports may partly reflect the eurozone recession and slowdown in emerging market demand. But it probably also reflects correction after two strong months in January and February.