21 June 2001, 18:19  US April trade gap seen as lighter drag on Q2 GDP than in Q1

By Cornelius Luca
New York, June 21 (BridgeNews) - The 2.7% narrowing of the U.S. goods and services trade deficit in April to $32.2 billion from the upwardly revised gap in March of $33.1 billion is likely to drag the second-quarter gross domestic product by less than it did in the first three months of the year. However, the shrinking of the trade deficit on the month from a much larger figure in March denotes that the domestic consumption pulsates firmly.
While the marginal declining trade gap showed that the domestic appetite for imports remained largely unabated, economists also noted that the foreign demand for U.S. products is sagging.
"The data is consistent to a second quarter GDP of 1.0%, and the 2.0% drop in exports is reflective of the weak overseas demand for U.S. products," said Jay Feldman economist at Credit Suisse-First Boston.
Softer consumer spending, a bigger reduction in inventories and lower exports left the U.S. economic expansion weaker in the first quarter than originally thought. Gross domestic product grew just 1.3% from January to March, below expectations of 1.4% and the government's initial estimate of 2.0%.
"I expect the April trade deficit to knock off around two tens of one percent from the second quarter GDP," said Eric Green, BNP Paribas Capital Markets economist.
Green also noted that the depressed foreign demand for the U.S. exports, which have declined for the second consecutive month, will make it very difficult for the domestic manufacturers to leapfrog the current slump.
Moreover, Green noted that the U.S. demand for foreign goods, while still strong a month-on-month basis, has been declining on a quarterly basis. Anthony Karydakis, vice president and senior financial economist at Banc One, believes the data appears neutral, in line with his idea of a Q2 GDP of 1.4%. Karydakis expects the Q1 GDP to be revised downward further. "We are in the process of stabilizing at the 31-33 billion area as the sharply slowing pace of domestic growth dampens imports," said Karydakis. Russ Sheldon, VP and Senior Economist at Nesbit Burns, is forecasting 0.5% for the Q2 GDP, but said the latest numbers were consistent with a 0.5% to 1% area.
Merrill Lynch economist Michelle Chesnika expects the trade deficit to have a positive impact on the Q2 GDP since it beat more negative estimates.
In the same vein, Gary Thayer, chief economist at AG Edwards, said he didn't see the data as a clear sign, but was looking for a slightly less drag on Q2 GDP. Thayer's forecast is for near zero Q2 growth because of employment and car sales' slump. He sees Q2 as the weakest quarter of the slowdown before the economy picks up later on rate cuts, tax rebates, and lower energy.
Just like most other economists and analysts surveyed, Thayer does not see any substantial impact from the numbers on the Fed policy. Indeed, despite the wide trade deficit, the Federal Reserve will likely remain in an easing mode. A BridgeNews poll showed Tuesday that economists have raised their expectations of yet another 50-basis point rate cut at the Federal Reserve's upcoming policy meeting next week.
Bill O'Grady, Director of Research at AG Edwards, said: "The key number was the decline in imports, which is sensitive to growth. This is confirmation of a slowing economy. The drop in exports is disconcerting but, like durable goods, t the data is tied to aircraft exports."
Economists believed that energy costs had a negative impact on the trade data. While prices were largely unchanged from March, the value of crude imports rose 5.3% to $9.7 billion. Volume rose to a record average 10.3 million barrels per day from 9.4 million the prior month.
In April, the price range for oil was $25.55 to $29.04 per barrel, little changed from March. The crude prices peaked at $31.87 per barrel in February.
The regional breakdown showed widespread deterioration of the trade deficit.
The U.S. gap with the euro zone the Pacific Rim countries widened to $5.133 billion from a $4.251 billion deficit, and to $16.022 billion from $14.798 billion. The gaps with Japan, China and the Asian newly industrialized countries all widened to $6.430 billion from $6.234 billion, to $6.294 billion from $5.739 billion, and to $1.820 billion from $1.431 billion, respectively.
Looking forward, Refco economist Michael Malpede was somewhat optimistic about the direction of the trade deficit "I don't see how the deficit can continue to widen when the economy is slowing," Malpede said.

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