Net exports likely to remain a drag on US economy in near term

The US trade deficit narrowed noticeably to USD 40.4 billion in March from February’s downwardly revised deficit of USD 47.0 billion. This is better than consensus projection of a deficit of USD 41.2 billion. In nominal terms, export dropped 1.6% m/m, whereas imports declined sharply by 3.6% m/m, resulting in narrower trade deficit. In volume terms, imports fell 4.1% m/m and 5.8% y/y in March.

The sharp decline in volumes of import implies that companies in the US continue to be wary amidst slowdown in personal consumption in Q1 2016, according to TD Economics. Dollar’s return to strength in recent weeks is expected to give US exporters respite for a brief period. But weak growth in external demand and dollar’s past appreciation are likely to continue putting downward pressure on US exports in 2016, which will weigh on the struggling manufacturing sector, noted TD Economics.

In spite of the brief fall in imports, the US trade data for March is in line with the view that net exports will continue to be a drag on the US economy in the near term, said TD Economics. The US dollar is not expected to weaken further through the rest of the year, while decline in competitiveness regarding the dollar’s past appreciation will weigh on US exporters.

However, in spite of the weak outlook for H1 2016 growth, tightening of labor market conditions and bolstering domestic demand are likely to give sufficient support to the outlook of inflation for the US Fed to start its gradual tightening of policy again later in 2016, added TD Economics.

In March, US exports in volume terms fell 1.4% m/m and 1.4% y/y due to drop in non-petroleum exports. The decline in exports in March reversed most of the gains recorded in February.