By Eric Morath
WASHINGTON--A stronger dollar and an influx of pent-up imports
into West Coast ports are pointing the U.S. economy toward its
third quarterly contraction in its six-year-long expansion,
reflecting choppy conditions that appear set to restrain growth
throughout the year.
The nation's trade deficit expanded by 43.1% in March from
February, the largest monthly widening since 1996, the Commerce
Department said Tuesday. A record level of non-petroleum imports
flowed into the U.S. after a labor dispute at West Coast ports
ended, causing the seasonally adjusted trade gap to widen to $51.37
billion.
That was significantly larger than economists had forecast, even
with pressure from a strong dollar and weak global growth. As a
result, revisions could push the official reading for first-quarter
gross domestic product into negative territory from the paltry 0.2%
annualized gain initially reported last week.
"The underlying story remains the same: Growth faltered at the
start of the year with very few signs of momentum," said Sterne
Agee economist Lindsey Piegza.
After the trade report, economists at J.P. Morgan Chase and
Deutsche Bank cut their first-quarter 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 tiny expansion for the
quarter.
The figures represent a setback for the U.S. economy, but it
overcame a similar one that surfaced last year.
Following a contraction in the first quarter of 2014, the
economy grew at an almost 4% pace for the rest of the year. And
employers added jobs last year at the best rate since the
mid-1990s, raising hopes that the long-awaited breakout had
arrived.
Instead, the U.S. appears to have again hit the brakes at the
start of the year. That exposes a host of concerns, including the
drag on growth from a stronger dollar, persistent weakness among
key trading partners in China and Europe and the reliance on U.S.
consumers to drive the world's economy.
"It's really a global challenge right now," said Marc Skalla,
president of Atlanta-based SASCO Chemical Group Inc., which makes
chemicals for tires and other industries. The firm expects sales to
grow by 20% this year, but the stronger dollar is squeezing export
profits.
A stronger dollar has "taken contracts that we worked on last
year and completely changed them," Mr. Skalla said. "We'll feel it
on the margins."
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. The Fed index shows the dollar's
value has fallen somewhat since early April, a move that could
cushion exporters from some of the fallout.
The latest economic setback comes with plenty of caveats.
Upcoming data on inventories and services could again recast the
view of the first quarter. The domestic economy also appears to be
relatively firm. Consumer confidence is rising, household spending
picked up since the winter and lower oil prices are likely to boost
many consumers and businesses this year.
March's trade gap was the largest of the expansion, driven by a
rebound after ports on the West Coast returned to normal following
a monthslong labor dispute. That helped imports post a record 7.7%
improvement on the month. Goods imports from China were up 32%
compared with March 2014. Meanwhile, exports only inched up
0.9%.
The trade gap in February, when the labor dispute ended, was the
smallest since late 2009. The three-month moving average for the
trade gap, a measure that evens out swings, shows it expanded
modestly from a year earlier.
Imports at the ports of Los Angeles and Long Beach, which
together handle around 40% of the U.S. imported container traffic,
reached near-record levels in March, which is typically one of the
slowest months of the year at the ports.
The Port of Los Angeles, the country's busiest container port,
said import volume grew 70% in March from February. Export volume,
which typically makes up only about half the business at Los
Angeles, wasn't as strong, growing 10% month to month and falling
23% from a year earlier.
The Maritime Exchange of Southern California said the backlog of
ships anchored at sea waiting for a port berth reached a peak of 36
ships the week of Feb. 26. The logjam had all but disappeared by
late last week.
Norfolk Southern Corp.'s business in the first quarter reflected
unusual activity related to the West Coast port issues, Chief
Executive Charles "Wick" Moorman said, adding that unusually cold
weather and the strong dollar are also factors in the import
surge.
By mid-March, the railway operator's business started to return
to normal, Mr. Moorman said. That repeats a pattern seen last year,
when economic output turned negative in the first quarter and then
snapped back quickly.
"It feels a lot like it did last year," he said.
JACO Machine Works LLC, a Santa Cruz, Calif., firm that produces
parts for medical equipment, scientific instruments and other
applications saw a slowdown in orders from a German customer.
"They tell me that European market is soft for them," President
Andy Smith said. In contrast, JACO has seen increased demand from
California firms building medical devices and robots. "The first
quarter wasn't great, but I still see a strong domestic
economy."
Despite the widening of the overall trade gap, the petroleum
deficit continued to narrow in the U.S. Over the past several
years, the amount of petroleum shipped to the U.S. declined while
domestic production increased.
The trade deficit for petroleum products fell to $7.67 billion
in March, the lowest since June 2002. After climbing above $100 a
barrel last June, benchmark oil prices plunged through the second
half of 2014 and have stayed near $50 a barrel most of this
year.
From a year earlier, U.S. imports are up 1% and exports are down
3%. The more subtle change suggests the appreciation of the dollar
hampers exports. In addition, slowing economies in parts of Europe
and Asia have reduced demand for U.S. goods and services.
How a turbulent global economy will shape the U.S. expansion is
high on the minds of Federal Reserve officials. In a statement
following last month's policy meeting, central bankers acknowledged
that economic growth slowed in the winter months.
If central bankers see global developments holding back U.S.
growth, they could wait longer to raise short-term interest rates
from near zero.
Jeffrey Sparshott and Paul Page contributed to this article.
Write to Eric Morath at eric.morath@wsj.com
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