The Commerce Department announced on Tuesday that the US trade deficit soared by 43.1% in March, the largest monthly trade gap (more imports, fewer exports) in almost two decades. A record level of non-petroleum imports flowed into the US after a labor dispute at West Coast ports ended earlier this year, causing the seasonally adjusted trade gap to widen to $51.37 billion.
That was significantly larger than economists had forecast. As a result, most analysts now expect the Commerce Department to revise its first estimate of 1Q GDP into negative territory at the end of this month, down from the paltry +0.2% annualized gain initially reported last week. If so, that means we have started the year with another negative quarter for GDP, just as we did last year.
After the trade report, economists at J.P. Morgan Chase and Deutsche Bank cut their 1Q GDP growth estimates to show a 0.5% contraction. Forecasting firm Macroeconomic Advisers lowered its reading by six-tenths of a percent to a 0.4% contraction. All three had previously estimated a small expansion for the quarter.
The second Commerce Department estimate of 1Q GDP will be released on Friday, May 29.
While the huge trade gap in March was quite bad, let’s revisit the West Coast ports strike. The nine-month strike caused hundreds of cargo ships containing US imports to pile-up outside US West Coast ports. These goods are not actually counted as imports until they are unloaded onto American soil.
With the strike settled in late February/early March, ports have been working overtime to offload these cargo ships, so imports have soared. Yet as things get back to normal just ahead, we are not likely to see another spike like we saw in March. We will continue to run a trade deficit but not of the magnitude we saw in March in the months ahead.
Forecasters continue to site the strength in the US dollar over the last year as a primary reason for the explosion in the trade deficit. A higher dollar means our exports are more expensive for foreign buyers, while imports from abroad are cheaper. From mid-2014 through the end of March, the dollar appreciated by more than 20% against a weighted index of major currencies tracked by the Federal Reserve.
Yet as we see in the chart above, King Dollar has declined since early April. It remains to be seen if that trend will continue, but most forecasters still believe the dollar will rebound and move higher later this year, which does not bode well for the economy since exports may continue to shrink.
US Investors Are Fleeing Stocks at Financial Crisis Pace
Not to change topics mid-stream today, but let’s do. For reasons that are not clear, US investors bailed on stocks and stock funds big-time in April. Last month, equity mutual funds and exchange-traded funds (ETFs) saw outflows of $35.8 billion, according to TrimTabs. That’s the biggest monthly move away from American stocks since October 2008.
And the negative trend is confirmed by money flows in the leveraged ETF space last month, where leveraged short ETFs saw an increase in assets of 4.6%, while leveraged long ETFs saw assets dip by 2.5%.
While fund flows information is by nature backward-looking, and some consider it a poor market direction indicator, the latest stampede out of equities in April stands in stark contrast to recent warnings that stocks were in bubble territory.
So the question is, why all of a sudden are investors fleeing from stocks in droves? The question is even more complicated given that indicators of consumer confidence are at or near their highest levels since 2007, before the Great Recession and the financial crisis unfolded.
Another theory is that US investors are moving out of domestic stock funds and ETFs because they want more exposure to international funds. TrimTabs reports that global equity funds have seen record inflows in recent months. No doubt, that is part of the explanation.
But here’s my take on it: US investors are very nervous, having been burned by two major bear markets since 2000, and it doesn’t take much to send them scurrying to the sidelines. We should get used to it.
As one analyst put it, this may be one of the “most unloved bull markets in history.” He may have a point. The American Association of Individual Investors (AAII) Bullish Sentiment Index is only 40%, down from near 60% late last year. That means a lot of money is on the sidelines, which some argue is bullish – on the assumption that all of this money will come back into the market at some point. Time will tell.
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