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trade and inventories could hold back second quarter growth

Posted by Joseph Trevisani on May 25, 2017 1:54:11 PM

The international trade balance and domestic sales inventories took sharp and unexpected downturns in April suggesting that the first quarter's weak economic growth may have continued into the second.

American merchandise imports outstripped exports by $67.6 billion, bigger than the negatively revised $65.1 billion deficit in March and the largest trade gap in two years.

Inventories at wholesale outlets declined 0.3 percent and stocks at retailers fell 0.2 percent in April. The prior month's gains, 0.2 percent and 0.3 percent respectively were revised down to 0.1 percent and 0.2 percent.  All figures reported by the Commerce Department. 

International trade and domestic inventories are the two most volatile items in the gross national product (GDP) calculation. Trade deficits are subtracted from economic growth. Inventories reflect anticipated sales and are an indicator of future orders to the manufacturing sector.

In the fourth quarter the trade balance averaged -$63.093 billion. The government estimated that it subtracted 1.82 percent from growth helping to produce the 1.9 percent annualized rate.  In the first three months of this year the trade deficit rose 4.6 percent to $66.010 billion and one consequence was more than halving the pace of GDP expansion to 0.7 percent.

The initial revision to first quarter GDP will be released at 8:30 am on Friday. The median forecast is for a slight rise to 0.9 percent.

The current estimate for second quarter growth from the Atlanta Fed’s GDPNow program was 4.1 percent on May 16th. An update will be issued after Friday’s durable goods report.

Inventory purchases are the chief source of orders to  manufacturers of consumer goods. Firms attempt to balance the cost of holding unsold goods with the need for prompt delivery to customers.   Falling inventories indicate that sales are below expectations and firms are likely to restrict new orders until the older merchandise is cleared.  

Wholesale inventories decreased on average 0.4 percent a month in the first quarter. Retail inventories grew an average of 0.1 percent.   In total, inventories reduced first quarter GDP by 0.93 percent contributing to the weak 0.7 percent rate,  according to the Bureau of Economic Analysis a division of the Commerce Department.

In comparison, in the fourth quarter, wholesale inventories expanded 0.63 percent on average and retail inventories rose 0.23 percent underpinning the 1.9 percent GDP increase. If inventories continue to shrink in May and June at the current rate the drag on second quarter GDP can only increase.

Durable goods order sfor April which will partially reflect today’s inventory figures are reported tomorrow at 8:30 am.  

Overall goods orders are forecast to fall 1.2 percent after rising 1.7 percent in March. They averaged 1.4 percent a month in the first quarter.  

Goods order excluding defense aircraft and parts, also called core capital goods and a proxy for business investment, are forecast to rise 0.5 percent in April as they did in March. The averaged 1.23 percent a month in the first quarter

Exports fell 0.9 percent in April while imports rose 0.7 percent. 

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Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thomson/Reuters, Atlanta Federal Reserve

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