U.S. Trade Deficit Narrowed to $38.8 Billion in March

• The US trade deficit was smaller than expected in March 2013 at $38.8 billion from a revised $43.6 billion (previously was $42.96 billion) in February. Market expectations had been for a $42.3 billion deficit.
• The narrowing in the trade balance in March reflected a $1.7 billion (-0.9%) decline in exports with imports slumping by 2.8% or $6.5 billion.
• Excluding the effect of prices, the real trade deficit (in chained 2005 dollars, Census basis) narrowed to $44.4 billion from $47.8 billion in March, and reflected both a 0.9% dip in exports and a 2.8% decline in imports on a volume basis.
• Initial claims for unemployment insurance in the US declined by 18,000 to 324,000 in the week ending April 27, 2013, thereby beating market expectations for a 345,000 reading. The decrease in filings in the latest week built on the 13,000 decrease to an upwardly revised 342,000 (was 339,000) in the previous week and brought claims to their lowest level since January 2008.
• The four-week moving average of initial claims, which better controls for weekly volatility, declined to 342,250 from 358,250 the previous week. Continuing claims for the week ending April 20, 2013 increased by 12,000 to 3,019,000.

The US trade deficit improved to $38.8 billion in March 2013 from a downwardly revised $43.6 billion in February. The details of the report showed declines in both exports and imports in the month. The decline in exports was broad based with the largest percentage drop in food sales. Autos, capital, and industrial machinery exports were also lower in March. Across the board, imports fell with the exception of "other merchandise". The largest percentage decline was in consumer goods imports followed by capital goods and autos.

Excluding the effect of prices, the real trade deficit (in chained 2005 dollars, Census basis) narrowed to $44.4 billion from $47.8 billion (revised from $48.0 billion) in February, and reflected both a 0.9% dip in exports and a 2.8% decline in imports on a volumes basis.

Throughout the first quarter of 2013, the US trade gap narrowed although the average was only slightly smaller than the fourth quarter of 2012's deficit due to the sharp deterioration that occurred in January 2013. The narrowing in March was greater than the Bureau of Economic Analysis assumed in its estimate of first-quarter 2013 GDP and, therefore, suggests that the drag from the trade sector will likely prove to be smaller than the 0.5 percentage points that were initially reported. The 3.2% annualized increase in first-quarter 2013 consumer spending was confirmed by the March personal consumption expenditures report released earlier this week. The pace of consumer spending going forward will in large part be informed by job gains. On that front, the claims report for the last week of April provided some encouragement as it indicated that number of claimants continued to fall during the course of the month.

The key release of the week will be tomorrow's non-farm payroll report, which is expected to show an increase of 140,000 jobs in April with the unemployment rate holding steady at 7.6%. This expected increase in April employment will be faster than March's gain of 88,000 although still indicative of a modest pace of hiring. Yesterday, the Federal Reserve confirmed that it intended to maintain a very stimulative monetary policy until the unemployment rate breaches 6.5%. Near-term economic weakness associated with the large government spending cuts will likely limit any further decline in the unemployment rate meaning that the Fed will maintain its full complement of easing measures aimed at supporting a reacceleration in growth and further declines in the unemployment rate.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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