By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. trade deficit fell to an eight-month low in February as imports from China plunged, suggesting President Donald Trump's "America First" agenda was starting to bear fruit.
The surprise narrowing in the trade gap reported by the Commerce Department on Wednesday also implied a much stronger pace of U.S. economic growth in the first quarter than initially anticipated at the start of the year.
The 20.2 percent drop in imports from China was the main driver behind a nearly 3.4 percent improvement in the U.S. trade deficit to $49.4 billion (£37.9 billion) in February, data from the Commerce Department showed. The trade deficit has narrowed for two straight months.
Economists polled by Reuters had forecast the trade shortfall would widen to $53.5 billion in February.
The politically sensitive goods trade deficit with China - a focus of the Trump administration's protectionist trade policy - decreased 28.2 percent to $24.8 billion in February as U.S. exports to the world's No. 2 economy jumped 18.2 percent.
But even with the improvement, the trade deficit remains large and February's drop in Chinese imports could be temporary. The trade data have been volatile in recent months amid big swings between exports and imports, because of the United States' conflicts with trading partners, including China.
Washington last year imposed tariffs on $250 billion worth of goods imported from China, with Beijing retaliating with duties on $110 billion worth of American products. Trump has delayed tariffs on $200 billion worth of Chinese imports and talks to end the trade impasse continue.
The U.S. goods trade deficit declined 1.7 percent to $72.0 billion in February, also the lowest level since last June.
When adjusted for inflation, the overall goods trade deficit fell $1.8 billion to $81.8 billion in February. The average goods trade deficit for January and February is significantly below the fourth-quarter average.
This suggests that trade could contribute as much as one percentage point to gross domestic product in the first quarter after being neutral in the October-December period.
A second report from the Commerce Department on Wednesday showed wholesale inventories increased 0.2 percent in February after vaulting 1.2 percent in January.
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Growth estimates for the January-March quarter are in a 1.5 percent to 2.3 percent annualised range, largely reflecting an accumulation of inventories amid slowing domestic demand. The economy grew at a 2.2 percent rate in the fourth quarter, slowing from the July-September period's brisk 3.4 percent pace.
U.S. Treasury prices were trading slightly higher while U.S. stocks were trading lower. The dollar was largely flat against a basket of currencies. The trade deficit in February was pushed down by a 1.1 percent jump in exports to $209.7 billion. Exports of services were the highest on record.
Goods exports increased 1.5 percent to $139.5 billion in February. The surge in goods exports is unlikely to be sustained against the backdrop of slowing global economic growth. The dollar's strength last year means U.S.-made goods are less competitive on foreign markets.
Exports of motor vehicles and parts increased by $0.6 billion in February. Shipments of civilian aircraft soared by $2.2 billion in February. But commercial aircraft exports are likely to decline in the months ahead following Boeing's decision to suspend deliveries of its troubled 737 MAX aircraft.
The MAX planes have been grounded indefinitely following two deadly crashes.
There was a modest increase in soybean exports.
In February, imports rose 0.2 percent to $259.1 billion. Consumer goods imports increased by $1.6 billion in February, led by a $2.1 billion rise in imports of cellphones and other household goods. Imports of industrial supplies and materials fell by $1.2 billion. Capital goods imports rose slightly, pointing to slower business spending on equipment.
Crude oil imports fell to 173.7 million barrels, the lowest since March 1992, from 223.1 million barrels in January. An increase in domestic production has seen the United States become less dependent on foreign oil.
"Trade is likely to switch back to being a drag on economic growth later this year," said Michael Pearce, a senior U.S. economist at Capital Economics in New York. "With economic growth in the rest of the world set to remain subdued, and the past appreciation of the dollar still feeding through, we expect export growth to weaken."
(Reporting by Lucia Mutikani; Editing by Paul Simao)