Trade deficit explodes to 6-year high

Washington

THE US trade deficit widened in March to the highest level in more than six years, fuelled by a record surge in imports as commercial activity resumed at West Coast ports following a resolution to labour disputes.

The gap increased 43.1 per cent, the biggest jump in 18 years, to US$51.4 billion, the largest since October 2008, the Commerce Department reported on Tuesday in Washington. Purchases of foreign-produced foods, capital goods and consumer products all set records, while demand for petroleum dropped.

Container ships streamed into West Coast harbours in March after port operators and dockworkers negotiated a new contract, allowing the flow of imported and exported goods to resume. At the same time, steady employment gains, a nascent pickup in wage growth and a stronger dollar may also help fuel domestic demand for foreign goods, which will keep the deficit wide.

"The big wrinkle in the trade data is the port showdown - all these ships that were at anchor outside the docks on the West Coast got offloaded in March," Stuart Hoffman, chief economist at PNC Financial Services Group Inc in Pittsburgh, Pennsylvania, said before the report. "The drag from trade should be persisting, but to a lesser degree."

The Commerce Department revised the shortfall for February to US$35.9 billion from an initially reported US$35.4 billion.

Imports increased 7.7 per cent to US$239.2 billion, the most this year, from US$222.1 billion in February. Capital goods such as industrial machines and computers, automobiles and parts and consumer products, including cellular telephones, clothing and furniture, flooded in as the backlog at West Coast ports subsided.

Crude oil was less in demand as the US continued its trajectory towards energy independence. The value of petroleum imports was the lowest since September 2004, making the fuel's trade gap the smallest in almost 13 years.

Excluding petroleum, imports were a record.

While exports also rose, the increase was swamped by the surge in imports, a sign that global demand remains weak. Sales of American-made products to customers overseas climbed 0.9 per cent to US$187.8 billion from US$186.2 billion in February.

After eliminating the effects of price fluctuations, which generates the numbers used to calculate gross domestic product, the trade deficit widened to US$67.2 billion in March, the largest in eight years.

The bigger-than-projected jump in the deficit probably means the US economy contracted in the first quarter when the Commerce Department issues revisions later this month.

The latest data showed the world's largest economy grew at a 0.2 per cent annualised pace in the first quarter after advancing at a 2.2 per cent rate in the previous three months. A widening trade gap subtracted 1.25 percentage points from growth. The government will incorporate Tuesday's data into the revised figures on gross domestic product.

Foreign exchange fluctuations are probably affecting US companies' abilities to stay competitive in a global market as a stronger dollar makes imported goods cheaper and domestically made goods more expensive for trade partners to buy.

Even after losses in April, the dollar is still the best- performing major developed currency over the past year, gaining 17.5 per cent, according to Bloomberg Correlation-Weighted Indexes. The euro dropped 8 per cent, while the Japanese yen fell 2.1 per cent, according to the indexes.

At the same time, US consumers with more jobs and higher pay at their backs may be ramping up demand for foreign-made goods, further exacerbating the trade gap.

"The first-quarter weakness is temporary, but the part that's not is the drag from trade, though it shouldn't be anywhere near as severe as it was during the first quarter," Mr Hoffman said. "The stronger dollar still means that any kind of growth we get in the US economy is going to be made in America."

Separately, the pace of growth in the US services sector rose to a five-month high in April, lifted by a surge in business activity that offset a sharp decline in exports, an industry report showed on Tuesday.

The Institute for Supply Management said its services index rose to 57.8 last month from 56.5 in March. Analysts were looking for a reading of 56.2, according to a Reuters survey.

The April reading was the highest since November. A reading above 50 indicates expansion in the sector.

The ISM's index of business activity rose from 57.5 in March to 61.6 in April, which was also the highest reading since November. Analysts were looking for a reading of 57.9.

The employment index was essentially unchanged, moving to 56.7 in April from 56.6 in March.

On the downside, the exports index plunged to 48.5 from 59, falling to its weakest since February 2014. BLOOMBERG, REUTERS