The Bureau of Economic Analysis (BEA) made revisions to its original estimate of first quarter GDP growth. The revision lowered first quarter GDP growth from an annual rate of +.2% to -.7%. Although there were minor revisions in multiple categories, the primary reason for the reduction in growth was due to a widening of our trade deficit. In its original estimate (released last month) the BEA estimated that net exports (exports minus imports) subtracted .96% from annual GDP growth. At that time, the data for the March trade deficit was not available so they had to estimate the number. The actual March trade deficit was worse than estimated, and thus the downward revision to first quarter GDP. The actual trade data resulted in net exports subtracting 1.90% from annual first quarter GDP growth versus the original estimate of .96%.
The new data shows the negative impact that exporters are experiencing from the stronger dollar. The data showed that exports subtracted 1.03% from annual GDP growth. Although the data does not provide insight into the exact reason for this decline in exports, the stronger dollar is the most obvious culprit. Intuitively, this makes sense. A stronger dollar makes U.S. products more expensive for foreign buyers. All else being equal, this would result in less demand for the product. The double whammy for GDP is that a stronger dollar makes imports cheaper. Imports subtracted .87% from annual first quarter GDP.
Dollar strength continues to be a risk for U.S. economic growth. Even though exports make up less than 15% of overall U.S. economic growth, the first quarter GDP data illustrates that exports can create volatility in economic growth and have a clear impact on the quarterly data.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.