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Don’t Freak Out, but U.S. Economy Probably Shrank in First Quarter

Yuval Rosenberg

The terrible March trade deficit data released Tuesday — the gap between U.S. imports and exports surged 43 percent to $51.4 billion, the highest since 2008 — likely means that the economy shrank a bit in the first quarter rather than growing at even the weak 0.2 percent annual rate the government initially estimated. But that surge in the trade gap, the largest since 1996, is more likely a result of a short-term hit to the economy than a signal of some new long-term concern.

Economists say the troublesome new numbers reflect the impact of the labor dispute that saw traffic through West Coast ports slow to a crawl for months until an agreement was struck in late February. The protracted and contentious contract negotiations and resulting disruptions left ships loaded with goods floating at sea and retailers frustrated about a lack of shipments needed to keep their businesses operating as usual.

Related: Port Dispute Shows Just How Fragile the U.S. Economy Has Become

Once the dispute was resolved on Feb. 21, the ports had a lot of catching up to do. The new data show that imports jumped by a whopping 7.7 percent as the reopened ports worked through the backlog that had built up. Exports didn’t rebound as strongly, climbing 0.9 percent from February.

In all, the new trade numbers suggest that first-quarter growth will be revised about half a percentage point lower because the jump in imports was much bigger than the Bureau of Economic Analysis, which compiles the GDP report, had initially estimated. The initial GDP report assumed that imports rebounded by as much as 5.6 percent in March, less than they actually rose after the end of the port dispute, and that imports climbed by 1.4 percent, more than they actually did.

The differences in how much imports and exports rebounded could also reflect the fact that incoming goods were unloaded first before the ships were restocked with cargo for export. In any case, the revisions would erase the modest GDP growth the BEA first estimated, resulting in a first-quarter contraction of about 0.3 percent to 0.4 percent, economists estimate.

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That damage wouldn’t necessarily carry through to the second quarter or the rest of the year. The trade gap should narrow back to more normal levels in April, assuming that most of the catch-up work is done, Paul Ashworth of Capital Economics explained, adding that some of the import data suggests that retailers are expecting a jump in consumer demand this quarter.

“The good news is that the level of imports is expected to ease once we get past the disruptions we saw at West Coast ports,” Diane Swonk of Mesirow Financial wrote in a blog post Tuesday. “The bad news is that imports are likely to continue to outpace exports in a world in which we are expected to grow faster than many of our trading partners.” A stronger dollar will only exacerbate those trends, Mesirow wrote.

Remember, too, that GDP shrank in the first quarter of 2014 before bouncing back to grow an average of 4.8 percent over the following two quarters. If the economy picks up as economists expect, we should still be in for another full year that delivers decent but unspectacular growth.

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