By Nico Grant
The improving American economy propelled higher imports and exports in February, in a sign the U.S. outperformed flagging foreign economies.
However, the trade deficit increased, which may be a drag on first-quarter gross domestic product.
The U.S. trade deficit in February was $47.1 billion, a rise over January’s revised figure of $45.9 billion. U.S. exports increased in February, but imports grew even more. The relatively strong dollar and weak global markets still drag the trade balance. While February’s figures reinforce the notion that the U.S. economy is on an even keel as world economies tilt off balance, the swelling trade deficit will likely flatten first-quarter GDP.
February’s trade deficit surged 22 percent compared to the deficit in February 2015. A $3 billion rise in imports and the tick down of service exports fueled the widening gap.
“It was a slight disappointment,” said David Sloan, an economist at 4Cast Limited. “We saw an unusual decline in the services sector which is usually a positive.”
Foreign companies are taking advantage of a strong dollar to sell cheap goods and services to Americans. Meanwhile, U.S. products and services are more expensive in foreign economies with sagging demand.
The trade balance report came the week after the jobs report, which showed that 215,000 jobs were created in March and wages grew. The unemployment rate ticked up to 5 percent as the labor force participation rate increased. The dollar has come off of its high, but is still relatively strong. The U.S. manufacturing sector continues to shed workers, but seems to be stabilizing. The Institute of Supply Management manufacturing index rose last week, indicating more orders.
But not every sign has been positive. First quarter GDP growth forecasts, already tepid at around 1 percent, are being revised downward because of the larger than expected trade deficit.
“We seem to be treading water,” said Mike Englund, an economist at Action Economics. “We’re neither improving nor backtracking in this recovery.”
The mixed economic picture has caused the Federal Reserve to exercise caution. The board delayed a planned rate hike for April. This week, Chair Janet Yellin indicated further hikes are still on-track. Analysts suggest interest rates may go up in June to stave off inflation, which recently hit 2.3 percent.
While the economy seems to be moving in the right direction, there are lingering concerns, even for February’s import figures.
Foreign companies may be shipping more goods into the United States, but they’re not selling all of them. The rate of inventory accumulation is high, according to Englund, of Action Economics.
“I don’t think the U.S. demand is strong enough to revive the economies of troubled places such as Latin America, China, Europe and Japan,” said Sloan, of 4Cast Limited.
But American consumers have kept U.S. exporters afloat as their sales suffered overseas.
Eco Fuel Worldwide, of Lake Worth, Fla., has seen its exports decline for the last six months. The company sells plant-based fuel for heating and cooking. Twenty percent of its product sells outside of the U.S., frequently to militaries, hotels and restaurants in Europe, South America and the Caribbean.
But as foreign demand slumped in 2015, President and CEO Dennis Paul said the company cut costs and sought new markets.
“We’re reduced our print advertising and got more into the social networks,” Paul said. “Our biggest cuts were the expenditure in trade shows, because they’re very pricey.”
Eco Fuel introduced new products such as camping kits, stoves, ovens and rapid deployment kitchens. The company also started selling to Canadian consumers. Previously, it had only targeted Canadian organizations, which was a small market.
The renewed focus paid off.
“We’re headed to the moon on the retail side of our business,” Paul said. “We’ve just acquired Walmart as a retailer for 2300 locations.”
While Eco Fuel is doing well, some companies haven’t fully recovered from the drop in exports.
For Abella Skincare, of Boca Raton, Fla., tumultuous beauty product sales in foreign markets have left the company scrambling to respond.
“From the middle to end of 2015, international sales went down,” said founder Eliana Belmonte. “We’re just improving, but sales are not as high as they were.”
Belmonte laid off some workers last year as she created new formulations and product lines. She says that her sales in Europe haven’t recovered, but there’s demand in Latin America, Asia and the United Arab Emirates for her lotions. Stable sales in the U.S. have saved her company.
Overall, there’s been an $8 million drop in toiletries and cosmetics exports between January and February 2016, creating real consequences for the entrepreneurs, executives and workers who rely on exports for their livelihood.
Belmonte’s company seeks no improvement in the near future.
“There have been signs the weakness is finding a base,” said economist Sloan. “I think exports will be subdued and flat.”
And that’s the problem – the U.S. economy overall is subdued. But it’s also stable, making it stronger than the unpredictable economies elsewhere.