Image: FILE PHOTO: A plane is seen during take off in New Jersey behind the Statue of Liberty in New York’s Harbor as seen from the Brooklyn borough of New York February 20, 2016. REUTERS/Brendan McDermid/File Photo
By Lucia Mutikani
WASHINGTON (Reuters) – The U.S. trade deficit narrowed sharply in March as exports increased to a record high amid a surge in deliveries of commercial aircraft and soybeans, bolstering the economy’s outlook heading into the second quarter.
While other data on Thursday showed a modest increase in new applications for jobless benefits last week, the number of Americans receiving unemployment aid fell to its lowest level since 1973, pointing to tightening labor market conditions.
Wage growth is also rising, with hourly compensation accelerating in the first quarter. Strengthening wage growth should put upward pressure on inflation and keep the Federal Reserve on a gradual path of monetary policy tightening.
The U.S. central bank on Wednesday left interest rates unchanged and said it expected annual inflation to run close to the Fed’s 2 percent target over the medium term.
“The good news is that we are exporting more, but with the labor markets incredibly tight, labor costs are accelerating as well,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “The rise in labor costs will undoubtedly factor into policymakers’ thinking when they meet again in June.”
The Commerce Department said the trade deficit tumbled 15.2 percent to a six-month low of $49.0 billion in March. The trade gap widened to $57.7 billion in February, which was the highest level since October 2008.
March’s decline ended six straight monthly increases in the trade deficit. The politically sensitive goods trade gap with China dropped 11.6 percent to $25.9 billion, which will probably do little to ease tensions between the United States and China.
U.S. President Donald Trump has threatened tariffs on up to $150 billion worth of Chinese goods to punish Beijing over its joint-venture requirements and other policies Washington says force American companies to surrender their intellectual property to state-backed Chinese competitors.
China, which denies it coerces such technology transfers, has threatened retaliation in equal measure, including tariffs on U.S. soybeans and aircraft. A U.S. trade delegation arrived in China on Thursday for trade talks.
Trump, who claims the United States is being taken advantage of by its trading partners, has already imposed broad tariffs on imported solar panels and large washing machines.
He recently slapped 25 percent import duties on steel and 10 percent on aluminum. But the tariffs and standoff with China are eroding business confidence. The Institute for Supply Management said on Thursday its national nonmanufacturing index fell for a third straight month in April.
From construction to mining, finance and professional services, businesses complained about the administration’s protectionist measures, which they said made “folks nervous,” and would “cause unintended consequences on all industries.”
The Trump administration argues that the perennial trade deficit is holding back economic growth. The economy grew at a 2.3 percent annualized pace in the first quarter, slowing from the October-December period’s 2.9 percent rate.
The dollar was little changed against a basket of currencies while prices for U.S. Treasuries rose. Stocks on Wall Street were trading lower.
BRIGHTENING PROSPECTS
Away from the trade uncertainty, prospects for the economy are brightening. In a separate report, the Labor Department said initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 211,000 for the week ended April 28.
Claims remained near a more than 48-year low of 209,000 touched during the week ended April 21. The labor market is considered to be near or at full employment. The unemployment rate is at a 17-year low of 4.1 percent, close to the Fed’s forecast of 3.8 percent by the end of this year.
The number of people receiving benefits after an initial week of aid dropped 77,000 to 1.76 million in the week ended April 21, the lowest level since December 1973.
Labor market strength is likely to be underscored by April’s employment report which is scheduled for release on Friday. Nonfarm payrolls probably increased by 192,000 jobs last month, according to a Reuters survey of economists, after rising only 103,000 in March.
With labor conditions tightening, wage growth is picking up.
Another report from the Labor Department showed hourly worker compensation accelerated at a 3.4 percent rate in the first quarter after rising at a 2.4 percent pace in the October-December period.
“The tight labor market is putting some upward pressure on wages, and this should continue as we look for the unemployment rate to trend lower,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania.
In March, exports of goods and services increased 2.0 percent to an all-time high of $208.5 billion, lifted by a $1.9 billion increase in shipments of commercial aircraft. There were also increases in exports of soybeans, corn and crude oil. Real goods exports were the highest on record.
Exports to China jumped 26.3 percent in March.
Imports of goods and services fell 1.8 percent to $257.5 billion, in part as the boost from royalties and broadcast license fees related to the Winter Olympics faded. There were decreases in imports of capital, consumer goods and crude oil. Imports from China fell 2.1 percent in March.
Another report from the Commerce Department showed new orders for U.S.-made goods rose more than expected in March, boosted by strong demand for transportation equipment and a range of other products, but business spending on equipment appeared to be slowing.
(Reporting By Lucia Mutikani; Editing by Andrea Ricci)
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