By Lucia Mutikani

WASHINGTON (Reuters] – In January, the U.S. merchandise trade deficit grew to a new record due to an increase of imports. Businesses continued replenishing depleted inventories.

The Commerce Department reported that the pace of inventory growth was slowing than it has been in recent weeks. This, along with an increase in goods trade deficit, prompted Goldman Sachs economists (NYSE:), to reduce their estimate of gross domestic product growth for the first quarter to 1.5% annually.

Fourth quarter GDP grew 7.0%, while inventories contributed a staggering 4.90 percent.

According to Daniel Silver (NYSE:), an economist with JPMorgan in New York, “We are on track for another strong gain of real business inventories during the first quarter. However, inventories could end up being quite close to a neutral indicator for GDP growth because the fourth quarter buildup was also substantial.”

In the last month, goods trade deficit increased 7.1% to $107.6billion. Food and motor vehicles led increases in goods imports by 1.7%. Also, imports of consumer goods, capital and industrial supplies increased by large amounts. The 15.3% drop in imports of goods other than industrial supplies was a result.

The 1.8% drop in exports was attributed to the decline of consumer goods and motor vehicles as well as food and other products. Exports of capital goods, industrial supplies and other items increased.

For six consecutive quarters, trade has been a major drag on gross domestic products. According to economists, the Russian-Ukraine war had a minimal impact on trade. This has led the United States to impose similar trade sanctions against Moscow. Last year Russia only represented 1% and 0.4% respectively of the total imports, according to official data.

Mahir Rasheed of Oxford Economics said that although the Russian invasion has led to a significant increase in energy costs, it is not affecting trade flows. Russia and Ukraine are small contributors to monthly import volumes (less than 1%) and have a very low share of U.S. trade exports. Therefore, the war does not impact the outlook for the global trade.

As investors reviewed the impact of a series of Western sanctions on Russia, U.S. stocks fell. Dollar rose against other currencies. U.S. Treasury yields declined.

INVENTORIES RISE

Imports increased last month in large part due to the recovery of inventories. After climbing 2.3% in December, stocks at wholesalers rose 0.8%. The inventories of durable goods (items that are designed to last for three years or more) increased 1.0% while the stocks of non-durable wholesale goods rose 0.5%.

Retail inventories increased 1.9% in January after rising 4.7% by December. After a December 7.0% increase, they were buoyed by a 2.4% rise in motor vehicle sales.

A global shortage of semiconductors continues to limit motor vehicle production. Retail inventories rose 1.7% in December, excluding motor vehicles. They grew 3.9% in December. This is used to calculate GDP growth.

In the fourth quarter of 2018, inventory investments increased at a seasonally adjusted annualized rate (171.22 billion), which is one of the highest rates in many years. The growth estimates for the quarter start at 0.6% and go up to 5.4%.

Matt Colyar from Moody’s Analytics (NYSE:) in West Chester, Pennsylvania said, “Because the GDP calculation is so complex, it would take a comparable sized increase of inventories in order to achieve that growth.” We don’t expect that the quarter-to-quarter increase in build will surpass the fourth-quarter record. We expect inventory to decrease GDP growth by 0.3 percent.

Economists believe that inventories can rise further, noting the fact that inflation-adjusted inventories are still below pre-pandemic levels. Low inventory-to-sales ratios also exist.

Supporting manufacturing is achieved through stocking after three consecutive quarters of low inventories.

The Dallas Federal Reserve released Monday’s survey showing that Texas factory activity increased slightly in February. The production index (a critical measure of the state’s manufacturing condition) fell two points to 14.5.

If the reading is above zero, it indicates that there has been growth in the manufacturing sector in this region. Although activity declined, factories still reported strong new order growth and optimism regarding business conditions. A survey index measuring general business activity rose 12 points to 14.0.

Rubela Farooqi is the chief U.S. economics officer at High Frequency Economics White Plains in New York.