Economists were expecting a large trade deficit in March based on the settlement of the labor dispute that had throttled shipping ports on the West Coast. However, the actual trade deficit figure released by the Bureau of Economic Analysis (BEA) was $51.4 billion, far surpassing the $41.7 billion estimates. That's the highest trade deficit since October 2008, representing a 43% increase. Total imports increased by 7.7% to $239.2 billion, while exports could only muster a 0.9% increase to $187.8 billion.
Is the March number just an artifact of the port dispute, or are there other structural economic problems at work? Many economists seem to think it's the former. Among them are Barclays Capital economist Jesse Hurwitz, who does not "view such a large trade deficit as a new trend for the US," and Joseph LaVorgna, the Chief US Economist with Deutsche Bank Securities, who points out that the average of the February import slump and the March rebound was "only modestly" above the trend in 2014.
The unusually strong dollar has had some effect by making imports cheaper. Capital Economics Chief Economist Paul Ashworth contends that the currency shifts shouldn’t be blamed for much of the March trade deficit, as it takes time for consumers to change their spending patterns in response to the stronger dollar. Of course, that also assumes that consumers have the disposable income to spend right now.
The export side of the equation may be more problematic. Export orders have dropped off sharply, as the dollar has risen approximately 12% against the currencies of America's primary trading partners. Meanwhile, the manufacturing component of the trade deficit hit a record of $72 billion, prompting Alan Tonelson of the RealityChek blog to note that "claims of a renaissance in US manufacturing don't pass the laugh test." That comment may be a bit harsh, but it's not entirely without merit.
Investors responded poorly to the trade deficit announcement, sending stocks and bond prices lower while the dollar fell. However, the effect was short-lived as positive signs followed. The dollar has been weakening recently, and a report from the Institute for Supply Management showed the services sector index rising to 57.8 (numbers above 50 indicate expansion). Improved growth in the services sector combined with a weakening dollar should narrow the trade imbalance that remains after the temporary surge from the ports.
It's highly likely that the next GDP report will revise Q1 GDP to show an overall contraction rather than the tepid 0.2% growth of the first estimate. Unless there is a similarly poor number for the initial Q2 estimate, the markets should respond with a shrug. That bad news has already been absorbed. Most savvy investors had already expected a large trade deficit and adjusted their portfolios to reflect their concerns.
From a consumer standpoint, what does this trade deficit mean for you? It's probably just a temporary amplification of the current effect of the strong dollar, meaning that imports may be an even better deal than usual for a short time. That may or may not reach consumer level pricing, but for big- ticket items, at least consider imports if you are looking for better deals. If you prefer to buy American goods instead, be prepared to pay more of a premium — at least in the short term.
In summary, everyone agrees that the March trade deficit was skewed by the port dispute. Most (but not all) economists think the effect is mostly transient. In a month, we'll find out who is right.