Those U.S. gross domestic product (GDP) figures that came out on Friday teach a neat little lesson in how imports can undermine the economic growth so desperately needed by the United States – and, by extension, the good job creation.
Nobody was happy with the 2.62 percent inflation-adjusted annualized rate of expansion reported for the economy for the fourth quarter of last year. Even though the figure will be revised twice more in the next few months, and could actually move up, it’s still much lower than the growth recorded for the second and third quarters, and lagged economists’ forecasts.
Last Friday, I commented that the quality of fourth quarter growth was a problem, too, with the share of the economy made up of personal consumption and housing together remaining dangerously near levels reached during the last decade. Those two sectors of the economy, of course, represented the toxic combination that inflated the biggest financial bubble of all time, and the worst downturn since the 1930s, along with a dreary recovery, once that bubble burst.
The personal consumption/housing share of the economy stood so high largely because personal consumption in the fourth quarter increased at a 4.60 percent annualized rate. That was the fastest since the first quarter of 2006, and much stronger than in the second and third quarters, when growth advanced by 4.51 percent and 4.88 percent, respectively. So why did the expansion of the consumption-heavy overall economy weaken in the fourth quarter?
Look for much of the answer in America’s trade accounts. Between the second and third quarter, as I’ve described, the nation’s after-inflation trade deficit surged from an annualized $431.4 billion to $471.5 billion – the worst since the third quarter of 2010. And this deterioration occurred despite the crash in oil prices, which greatly reduced the nation’s oil import bill and therefore prevented the trade gap from getting much wider.
But here’s where cheap oil becomes a double-, and even triple-edged, sword. The United States of course has now become a major producer, thanks largely to the fracking revolution. And as I’ve pointed out previously, this development makes the American economy vulnerable on two fronts. First, less oil consumption now increasingly means less consumption of something produced domestically, not abroad. So that per se reduces growth. Second, as widely reported, when energy prices fall enough, producers start both closing down production facilities and cutting capital spending on exploration and new facilities. Both translate into less domestic output and less growth.
As a result, the trade deficit’s growth – which has occurred cumulatively since the current U.S. economic recovery technically began in mid-2009 – shows us that even as the nation has been consuming less increasingly domestically produced oil, it keeps consuming more foreign-made goods and services. These imports subtract from growth – and deserve major blame for the disappointing (so far) fourth quarter performance.
Indeed, the official data show that the growth of the trade deficit cut that 2.62 percent fourth quarter annualized real growth by 1.02 percentage points – i.e., by nearly 39 percent! In the third quarter, the deficit’s nice improvement (entirely due to oil – and then some) boosted the 4.88 percent annualized real growth by 0.78 percentage points – i.e., by just under 16 percent. For some reason, less attention has been paid to the full-year 2014 growth figures also reported Friday by the government, but they were shaped by the same trend.
And there’s every reason to think that trade will keep undermining America’s underwhelming recovery and preventing the nation from reaping the maximum benefits of the energy revolution. For President Obama is pursuing the same types of trade deals that have considerably boosted the deficit, and cut the U.S. growth rate, for decades. Whether he gets his way, or whether Congress checks these economically perverse ambitions, will go far toward determining how quickly, if ever, the economy truly heals from the financial crisis.