The data on goods trade for February suggested that the widening goods trade deficit because of tariffs was not a one-off.
While a large part of the increase in the trade deficit was because of gold imports in January, deficits also increased in other important categories like automobiles and consumer goods.
Because of the delay in tariffs on Canadian and Mexican goods until April, we should expect the goods trade deficit to remain elevated in March, keeping the drag on gross domestic product in the first quarter a real concern.
That said, the increases in wholesale and retail inventories in February and earlier were much less significant than what the trade deficit data might suggest, implying that businesses and consumers were more likely than not able to spend down those extra imports.
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This alleviates some of our prior concerns that the increase in goods imports might cause an unnecessary rise in inventories that would remain on the shelves longer than businesses would prefer.
Clearly, this dynamic means we should not overreact to growth concerns if we see a weak GDP number for the first quarter. But it also suggests that spending on both business equipment and consumer goods might slow materially in the second quarter because of advanced purchases compounded by the impact of higher prices from tariffs.
