The good news?  The trade gap narrowed a bit in February to $45.8 billion, although not as much as economists had predicted.  Imports dropped by 1.7% despite sharp increases in petroleum prices.  The bad news?  Exports dropped almost as much, and the year-on-year trade deficit increased:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total February exports of $165.1 billion and imports of $210.9 billion resulted in a goods and services deficit of $45.8 billion, down from $47.0 billion in January, revised. February exports were $2.4 billion less than January exports of $167.5 billion. February imports were $3.6 billion less than January imports of $214.5 billion.

In February, the goods deficit decreased $1.0 billion from January to $59.3 billion, and the services surplus increased $0.3 billion to $13.6 billion. Exports of goods decreased $2.5 million to $118.0 billion, and imports of goods decreased $3.4 billion to $177.3 billion. Exports of services were virtually unchanged at $47.2 billion, and imports of services decreased $0.2 billion to $33.6 billion.

The goods and services deficit increased $6.0 billion from February 2010 to February 2011. Exports were up $20.5 billion, or 14.2 percent, and imports were up $26.6 billion, or 14.4 percent.

As can be seen in this chart over the last two years, the export trend line has been mildly positive for the last 18 months or so until this report.  However, imports increased even more in the same period and started peaking over the previous two months before dropping sharply in February:

In terms of the overall economy, increases in both lines show growth, although in this case the growth has not exactly been spectacular.  The deficit itself isn’t necessarily a big problem at this level, although we’d obviously prefer to be a net exporter rather than importer.  Our energy policy prevents that, at least in part, and it also makes it more difficult to buffer for international unrest in oil-producing nations.  The big problem with the deficit’s growth over this period of time is that the dollar has been weakening in the same period, which should have helped boost international demand for American exports and narrowed the trade gap.

That’s not the main problem with this report, though; we’ve been living with significant trade deficits for decades now.  The sudden dip downward in both imports and exports indicates a reversal in demand both at home and abroad.  As Reuters reports, that could signal a slowdown in the economy, which analysts expected to do significantly better in 2011Q1 than in 2010Q4:

Analysts surveyed before the report had expected the deficit to narrow to $44.5 billion, from the previously reported January tally of $46.3 billion.

U.S. stock and bond markets showed little reaction to the report, while the dollar extended losses against the euro to hit its weakest level in 15 months.

The trade report “shows there are headwinds for the global economy … There are lot of geopolitical uncertainties weighing on trade,” said Michelle Meyer, senior economist at Bank of America Merrill Lynch in New York.

The smaller-than-expected narrowing of the trade gap “could pose a risk to Q1 GDP, which we have penciled down at a 1.5 percent increase quarter over quarter,” she said.

But Michael Woolfolk, senior currency strategist with BNY Mellon in New York said the report showed the U.S. economy was still growing despite the disappointing trade numbers.

There were few if any severe weather events in February that would account for the drop in demand.  The main problem appears to be rising gas prices, which are eroding the buying power of middle-class American families, as this CNN report notes:

The drop in imports and exports, especially in the context of rising energy prices, could signal a new bout of stagnation for the US economy, depending on whether those trends extended into March. We’ll get the preliminary Q1 GDP number before we know the answer to that question, but it bears watching.