Big Improvement in US Trade Isn't Expected to Last Long
The after-effects from the March earthquake and tsunami in Japan left behind one seemingly positive impact on the US economy: An unexpected shrinking in the massive trade deficit. But that improvement may not last long.
Markets rallied Thursdayon news that the trade gap, long a thorny issue for the economy, contracted in April to $43.7 billion, a 6 percent narrowing from the previous month. Economists look to a lowered amount of imports compared to exports as evidence of a bustling manufacturing economy.
After a week's worth of losses, stocks took the news as reason to rise, jumping 1 percent even as more weakness appeared in the jobs picture.
"Basically it's a good indication that maybe the economy is not going to be as weak in this quarter as we perceived it to be," said Peter Cardillo, chief economist at Avalon Partners in New York. "It certainly points to the fact that this soft patch should not be long-lasting and we should see growth resume in the third and fourth quarters."
But the improvement isn't likely to last.
Most of the $3.1 billion decline camefrom Japan and a $2.5 billion drop in auto-related imports. The tsunami devastated the Japanese auto industry, slowing parts distribution and production essential to US car manufacturing and sales.
With Japan recovering more quickly than expected from the disaster, the drop in imports likely will be quickly reversed.
"There was a huge decline in imports from Japan and there was a very large decline in imports of motor vehicles, presumably from Japan," said David Resler, chief economist at Nomura Securities. "Those declines in imports contributed to a much bigger swing in the trade balance than most people expected."
The question now is what impact the drop in imports will have on gross domestic product numbers.
Resler looks at the Japan effect beyond the April trade numbers—instead focusing on the idea that much of the recent slowing of US economic growth, in fact, was caused by the disaster and thus will be reversed in the months ahead. If that's the case, then auto production could rebound as more parts start arriving again from Japan, helping the overall economy.
"It's pretty clear that the relatively weak performance of the economy in the second quarter was primarily a slowdown in auto production and all the associated things that go with it," Resler said. "I view that as largely transitory."
But others think that GDP growth is unlikely to improve very much.
"To start with, some of the boost to GDP growth will presumably be offset by a drag from a fall in autos inventories," wrote Paul Dales, chief US economist at Capital Economics in Toronto. "On top of that, at some point the narrowing in the real trade deficit caused by a fall in production in Japan will be reversed."
Dales thinks GDP likely won't do much better than the first quarter's disappointing 1.8 percent growth rate.
But Resler counters that other weather-related factors—primarily the tornadoes that tore apart the American heartland in recent weeks—also have weighed on growth and will be reversed.
"We'll get bounced-back car production in the third quarter at the same time that tens of thousands of homes that have been destroyed by tornadoes and floods and so on are already being rebuilt," he said. "That's going to benefit like housing starts and construction. There's reason to believe there's going to be a rebound from these transitory factors."