Improvement in February Trade Balance Hides Weak Internals: Some Weather, Some Not

The US trade deficit declined sharply in February, a move that will provide some lift to 1Q15 GDP growth when it is released late this month. However, the details beneath the trade news were not favorable. As the U.S. Census Bureau stated, the trade deficit declined because “imports decreased more than exports.” While it is the trade deficit that shows up directly in GDP, exports are the most important component of the trade data and they declined in February for the fourth straight month.

We focus on exports because they represent an exogenous source of demand for US producers. Imports most typically rise and fall in sympathy with similar swings in domestic demand. So, if imports are falling, as they were in February, that generally reflects a decline in US domestic demand. While the drop in imports by itself is a positive for growth, the underlying, driving drop in domestic demand is certainly a negative and more important.

The accompanying chart shows exports and imports separately, both adjusted for price changes and both abstracting from the volatile petroleum and motor vehicle sectors. As you can see in the chart, the February drop in imports was indeed much sharper than the accompanying drop in exports. However, both those February swings were overstated by severe weather on the East Coast and a port strike on the West Coast.

Apart from ephemeral factors, the substantive move here is the downtrend in exports since October. Both exports and imports will rebound in the spring with better weather and a cessation of the strike. However, there appears to be more to the export decline than ephemeral factors, so when the data do rebound in the spring, we will most likely be left with weaker export trends than appeared to be the case last year.

As for the excluded sectors, exports of oil have weakened lately, reflecting the effects of much lower prices on domestic oil patch activity. For motor vehicles, exports dropped much more sharply in February than did imports. It is hard to blame this on weather or strikes. At this point, it is not clear what this means, but it is not a favorable development.