(What’s Left of) Our Economy: Little to Like Trade-Wise in the New U.S. GDP Report

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CCP Virus, coronavirus, COVID 19, digital services tax, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, real GDP, services, services trade, trade deficit, Wuhan virus, {What's Left of) Our Economy

Today’s first official report on U.S. economic growth in the third quarter of this year was not only much worse than the final results revealed for the second quarter. It was also a near-mirror image of its predecessor estimate of the increase in the gross domestic product (GDP) in terms of its trade figures – and not in a good way.

Chiefly, during the second quarter, the economy grew at a strong clip (6.56 percent after inflation at an annual rate) while the real trade deficit practically stabilized versus the first quarter figure. In fact, this progress prompted me to venture that a pretty encouraging post-CCP Virus trade normal could be settling in for Americans.

But third quarter inflation-adjusted annualized growth was just two percent – the worst such performance since the pandemic-induced nosedive of last year’s second quarter – and the trade deficit increased sequentially by 5.40 percent. The $1.3117 trillion annualized total, moreover, was the fifth straight record quarterly high. And just for good measure this level also represented an all-time high for the real deficit as a share of price-adjusted GDP (6.74 percent).

The quarterly trade gap growth rate was still the second slowest of the current (still CCP Virus-distorted) economic recovery. But it’s much faster than the 1.50 percent increase between the second and third quarter. Worse, the prospect of stronger future GDP growth (assuming the pandemic resumes easing), and an untangling of the supply chain bottlenecks that have dramatically impacted both import and export flows, could well create a renewed trade shortfall surge in the coming quarters.

That possibility should concern more than just trade watchers, because that sequential increase in the deficit reduced third quarter growth for the total economy by 1.14 percentage points. So if the trade gap hadn’t increased at all, GDP would have expanded by 3.14 percent in real annualized terms. That’s still not spectacular, but it would have been an improvement of fully 57 percent. And it’s the biggest relative trade hit to growth since the third quarter of 2018, when the deficit’s increase sliced 1.66 percent points off of the 1.93 percent total growth figure – cutting it by 86.01 percent.

The only small bright spot in the new GDP report came in goods trade – which accounts for the vast bulk of U.S. trade flows. Its after-inflation annualized third quarter trade deficit of $1.4234 trillion was just 1.53 percent higher than the second quarter figure. And although it represented an acceleration ove the second quarter’s sequential increase of just 0.44 percent, the speed-up was far from alarming.

The big problem with the third quarter real trade figures came on the services side. The sector has suffered the most virus-related damage of any in the economy, but the plunge in its long-time surplus of 25 percent, to $114.3 billion, was stunning nonethless. The level was the lowest level since the $110.9 billion recorded in the second quarter of 2007, and the sequential drop by far the biggest ever on a relative basis– surpassing those during the Great Recession following the financial crisis of 2007-08, and even during the early CCP Virus and lockdowns period.

Services exports actually rose a bit sequentially – by 0.94 percent, to $614.7 billion. The total was the best of the pandemic era, but still 20.55 percent below pre-pandemic (fourth quarter, 2019) levels. Services imports, however, jumped by 9.59 percent. The new $500.4 billion total was also the highest of the CCP Virus period and 8.52 percent below that of the fourth quarter of 2019. In addition, the quarterly increase was the biggest of all time. (Detailed service trade figures only go back to 2002.)

If it lasts, the heavy concentration of the economy’s trade problems in services industries could provide the real deficit’s growth with some extra oomph.  The problem isn’t just that the virus’ resilience could keep the sector under continuing and unusual pressure, which would mean that it won’t be nearly as much of a trade winner as before 

It’s also that there seems to be only a slim chance that trade policy can make much of a difference – since so many countries view service sectors like telecommunications and finance (and now digital services) as crucial to their own futures, and want to maintain and increase their own players’ advantages.  That’s mainly why services trade liberalization has made so much less progress than goods trade liberalization. Indeed, the United States and five European countries have just managed to avoid a trade war fought over and with digital services taxes – which would have been new trade barriers. 

At this point, it seems, the nation will have its hands full simply preventing higher trade deficits from becoming major drags on growth.  Anyone awaiting significant reductions in the shortfall, even as a share of GDP, will likely need lots of patience.              

(What’s Left of) Our Economy: New U.S. GDP Data Still Show Trade Normalization — Pre-Delta

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CCP Virus, China, coronavirus, COVID 19, exports, GDP, goods trade, gross domestic product, growth, imports, inflation-adjusted growth, lockdowns, real growth, real trade deficit, services trade, Trade, trade deficit, vaccine mandates, Wuhan virus, {What's Left of) Our Economy

Today’s third (and final, for now) official read on U.S. economic growth in the second quarter confirms that at least as of June, the nation’s trade flows had made impressive progress toward returning to a pre-CCP Virus form of normality. The trouble still is, though, that these data cover a three-month stretch that came just before the highly infectious Delta variant of the virus arrived state-side in force, kicking off a new round of mandated and voluntary curbs on business and consumer behavior that will clearly impact the third quarter’s exports, imports, and trade balances – among other measures of economic performance.

The key sign of such trade normalization – the dramatically slowing rate at which the total U.S. deficit is increasing. It’s the same pattern that U.S. public health authorities spoke about early in the pandemic when they focused on “bending the curve.” The idea is that huge, powerful trends rarely reverse themselves overnight, or even quickly. When they’re harmful, the most realistic early aim policy- and other decision-makers can seek is slowing the rate at which they become worse.

And these latest second quarter numbers add to the evidence that trade deficit worsening has nearly stopped. Last month’s previous government estimate of the gross domestic product (GDP), its change, and how its individual components have grown or shrunk in inflation-adjusted terms (the terms most widely watched) revealed that the combined goods and services trade shortfall was only 1.71 percent wider ($1.2471 trillion at annual rates) than in the first quarter ($1.2261 trillion).

This morning, though, the overall trade gap was pegged at a smaller $1.2445 trillion – just 1.50 percent more than in the first quarter. The absolute level of the deficit remains enormous. In fact, as such, it’s still the biggest ever (and still the fourth straight record quarterly total). More important, at 6.43 percent the size of the total economy, it’s still the biggest trade gap ever in relative terms, too.

In addition, the second quarter’s inflation-adjusted overall trade deficit was a full 46.83 percent greater than the $847.6 billion annualized figure recorded in the fourth quarter of 2019 – the last full quarter before the CCP Virus began distorting U.S. trade flows by weakening the economy of enormous trade partner China.

But between the second and third quarters of last year, when the economy was rebounding strongly from its short but dizzying pandemic- and lockdown-induced recession, the real trade deficit skyrocketed by 31.81 percent. So the curve has not only been bent – it’s nearly flattened. And in price-adjusted terms, the government’s U.S. economic growth estimate for that April-through-June period this year came in this morning at 6.56 percent at annual rates – a bit better than last month’s 6.40 percent.

Slightly better trade deficit improvement coupled with slightly stronger economic growth is definitely good news, and it’s confirmed by the figures on the impact on growth of the trade deficit change. Last month, the Commerce Department (which compiles and reports the GDP statistics) announced that the constant dollar trade gap’s modest sequential increase over the first quarter level cut after-inflation U.S. growth by 0.24 percentage points. In other words, had the deficit simply remained the same, second quarter growth would have been 6.64 percent annualized, not 6.40 percent.

The new numbers show that the deficit’s smaller increase reduced second quarter growth by just 0.18 percentage points. So if the trade gap hadn’t worsened at all, real economic growth would have hit 6.74 percent, not 6.56 percent.

The manner in which the second quarter’s constant dollar trade gap improved over the second read was encouraging, too – although the pattern was not quite as positive as that reported last month.

That GDP release judged that total exports improved by 1.60 percent (to $2.298 trillion annualized) over the first quarter’s level, not by the originally reported 1.47 percent. Total imports, by contrast grew more slowly – by l.64 percent, not 1.90 percent (and reached $3.5457 trillion).

According to today’s GDP report, the total sequential export increase was a faster 1.85 percent (to $2.3042 trillion at annual rates), but the total import increase was as well (1.73 percent, to a slightly higher $3.5487 trillion).

Just as important, after-inflation total exports are still 9.76 percent below their immediate pre-virus (fourth quarter, 2019) levels, but total imports are 4.35 percent higher, and the latest second quarter figure is still a second straight quarterly record.

Goods trade accounts for the vast majority of U.S. trade flows and today’s second quarter revisions saw the longstanding constant dollar deficit level rise marginally, from $1.4014 trillion annualized to $1.4020 trillion. This figure remained the fourth straigh all-time high for this indicator, but was a mere 0.44 percent worse than its first quarter counterpart, and thus represented a major slowdown from the 20.40 percent spike seen during last year’s third quarter GDP boom.

For a change, even though the service sector has been the hardest hit by the virus by far, its new real trade surplus figures improved over the previous read – from $151.2 billion at annual rates, to $152.4 billion. Nonetheless, this still represented the weakest quarterly performance since the third quarter of 2010’s $161.7 billion – when the economy’s recovery from the 2007-2008 financial crisis and Great Recession remaine in early stages.

The rapid spread of the Delta variant and consequent business restrictions and renewed consumer caution are widely forecast to depress U.S. growth considerably (see, e.g., here) – which usually heralds a considerable reduction in the trade deficit. But even if economic form follows, the unpredictability of the pandemic and the responses it generates means that it’s anyone’s guess as to how long any particular trend will last.

(What’s Left of) Our Economy: More Trade Normality Revealed in New GDP Figures – But for How Long?

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CCP Virus, coronavirus, COVID 19, Delta variant, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, lockdowns, real exports, real GDP, real imports, real trade deficit, recession, recovery, services trade, Trade, trade deficit, Wuhan virus, {What's Left of) Our Economy

Last month, I reported that the trade highlights of the first official read on U.S. economic growth in the second quarter of this year showed signs that some form of normality was returning to the nation’s international trade flows after months of unprecedented pandemic-era fluctuations. This morning, the second government estimate of the second quarter gross domestic product (GDP) came out (next month we’ll see the final version – for now), and the signs of a new normality look even stronger.

Specifically, the sequential growth of America’s inflation-adjusted trade deficit during this period was even slower than the slowish rate presented in last month’s GDP release – and using the phrase “to a crawl” seems justified in describing the pace.

That initial estiimate revealed that the real trade gap’s quarterly widening had slowed from the sizzling 31.81 percent in the third quarter of last year, when the economy was roaring back from its brief but epic CCP Virus- and lockdown-induced crash dive to just 2.69 percent between this April and June (a strong growth period itself, but nothing compared with the initial recession rebound). Today, however, the after-inflation trade shortfall’s expansion came in at just 1.71 percent for the second quarter – when real growth itself clocked in at 6.40 percent on an annual basis, not the 6.35 percent estimated last month.

The new number for the second quarter’s price-adjusted trade deficit, $1.2471 billion annualized, remains astronomical by any reasonable standard. Not only is it still the biggest such figure in absolute terms. It’s the biggest such figure in relative terms – as a share of real GDP – where it still stands at 6.44 percent. And this revised trade deficit remains the fourth straight all-time high recorded. For some more perspective, the inflation-adjusted gap is also still 47.13 percent wider than where it stood in the fourth quarter of 2019 ($847.6 billion), just before the pandemic and its effect began weakening and distorting the economy.

More encouragingly, though, the new trade deficit result is a significant improvement over the $1.2590 trillion first reported. Also on the plus side, the after-inflation trade deficit’s sequential rise cut only 0.24 percentage points from the quarter’s 6.40 percent growth at an annual rate. That is, had the second quarter deficit stayed at its first quarter level, second quarter growth would have been 6.64 percent annualized – or 3.75 percent faster.

It all adds up to the trade deficit’s best such effect on real GDP change in absolute terms since the second quarter of 2020, when the deficit’s shrinkage prevented the nearly 36 percent pandemic-produced real GDP plunge from becoming slightly worse. By contrast, in the first quarter of this year, the inflation-adjusted trade shortfall’s increase cut the 6.14 percent annualized real growth figure by 1.56 percentage point. So had there been no sequential increase at all, that quarter’s price-adjusted growth would have been 7.70 percent at annual rates – a difference of fully 25.41 percent.

The manner in which the second quarter’s constant dollar trade gap improved over the initial read was good news as well, as after-inflation exports rose faster and their import counterparts climbed more slowly than reported last month.

Rather than growing by 1.47 percent sequentially during the second quarter, total after-inflation exports were judged to have advanced by 1.60 percent. At $2.2980 trillion annualized, though, they’re still 9.98 percent lower than in the fourth quarter of 2019 – the last full quarter before the CCP Virus’ arrival. As a result, the second quarter’s real export performance was an even greater improvement over the first quarter’s 0.73 percent dip than previously thought.

Combined goods and services imports were reported up by 1.64 percent between the first and second quarters, not 1.90 percent, as originally reported. This new figure also beat the first quarter’s 2.25 percent sequential real import increase.

At the same time, the new inflation-adjusted total import figure of $3.5547 trillion annualized still represents their second straight quarterly record, and such purchases from abroad are still 4.26 percent higher than their fourth quarter, 2019 level.

Turning to goods (the vast majority of U.S. trade flows), the second GDP read for the second quarter left standing their dubious record of a fourth straight all-time high trade deficit. But as with the overall trade deficit, the new figure of $1.4014 trillion annualized was a solid improvement from the previously reported $1.4610 trillion. And as a result, the second quarter number was only marginally (0.40 percent) worse than the first quarter figure, making clear a major slowdown in this indicator’s rise as well (from 20.40 percent during last year’s super-growth third quarter).

Unfortunately, the revised second quarter real service trade figures told a story that was especially gloomy even given this sector’s well known and disproportionate virus- and lockdown-induced woes. The long-running service trade surplus is now pegged at $149.5 billion for the April-through-June period. That’s a figure lower than the $151.2 billion previously reported, and the weakest quarterly result since the $161.7 billion recorded in the third quarter of 2010, when the recovery from the 2007-2008 financial crisis and Great Recession was in its earliest stages.

Also unfortunate – and frustrating: Whatever is shown in the final (for now) second quarter GDP report, the results will be pre-Delta variant. So although today’s data shows trade normalization to be even closer than previously thought, that next set could be of limited use at best in figuring out how long it’s going to last.

(What’s Left of) Our Economy: Dangerous New Bubbles or a Virus Mirage?

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bubbles, business investment, CCP Virus, consumer spending, coronavirus, COVID 19, Financial Crisis, GDP, Great Recession, gross domestic product, housing, lockdowns, logistics, nonresidential fixed investment, real GDP, recession, recovery, reopening, Richard F. Moody, semiconductor shortage, toxic combination, transportation, West Coast ports, {What's Left of) Our Economy

Here’s a great example of how badly the U.S. economy might be getting distorted by last year’s steep, sharp, largely government-mandated recession, and by the V-shaped recovery experienced since then.as CCPVirus-related restrictions have been lifted. Therefore, it’s also a great example of how the many of the resulting statistics may still be of limited usefulness at best in figuring out the economy’s underlying health.

The possible example?  New official figures showing that, as of the second quarter of this year, the U.S. economy is even more dangerously bubble-ized than it was just before the financial crisis of 2007-08.

As RealityChek regulars might recall, for several years I wrote regularly on what I called the quality of America’s growth. (Here‘s my most recent post.) I viewed the subject as important because there’s broad agreement that a big reason the financial crisis erupted was the over-reliance earlier in that decade n the wrong kind of growth. Specifically, personal spending and housing had become predominant engines of expansion – and therefore prosperity. Their bloated roles inflated intertwined bubbles whose bursting nearly collapsed the U.S. and entire global economies, and produced the worst American economic downturn since the Great Depression of the 1930s.

As a result, there was equally broad agreement that the nation needed to transform what you might call its business model from one depending largely on borrowing, spending, and paying for them by counting on home prices to rise forever, to one based on saving, investing, and producing. As former President Obama cogently put it, America needed “an economy built to last.”

Therefore, I decided to track how well the nation was succeeding at this version of “build back better” by monitoring the official quarterly reports on economic growth to examine the importance of housing and consumption (which I called the “toxic combination”) in the nation’s economic profile and whether and how they were changing.

For some perspective, in the third quarter of 2005, as the spending and housing bubbles were at their worst, these two segments of the economy accounted for 73.90 percent of the gross domestic product (GDP – the standard measure of the economy’s size) adjusted for inflation (the most widely followed of the GDP data. By the end of the Great Recession caused by the bursting of these bubbles, in the second quarter of 2009, this figure was down to 71.55 percent – mainly because housing had crashed.

At the end of the Obama administration (the fourth quarter of 2016), the toxic combination has rebounded to represent 72.31 percent of after-inflation GDP. So in quality-of-growth terms, the economy was heading in the wrong direction. And under President Trump, this discouraging trend continued. As of the fourth quarter of 2019 (the last quarter before the pandemic began significantly affecting the economy), this figure rose further, to 73.19 percent.

Yesterday, the government reported on GDP for the second quarter of this year, and it revealed that the toxic combination share of the economy in constant dollar terms to 74.24 percent. In other words, the toxic combination had become a bigger part of the economy than during the most heated housing and spending bubble days.

But does that mean that the economy really is even more, and more worrisomely lopsided than it was back then? That’s far from clear. Pessimists could argue that recent growth has relied heavily on the unprecedented fiscal and monetary stimulus provided by Washington since spring, 2020. Optimists could point out that far from overspending, consumers have been saving massively. Something else of note: Business investment’s share of real GDP in the second quarter of this year came to 14.80 percent – awfully lofty by recent standards.  During the 2005 peak of the last bubble, that spending (officially called “nonresidential fixed investment”) was 11.62 percent. 

My own take is that this situation mainly reflects the unexpected strength of the reopening-driven recovery and the transportation and logistics bottlenecks it’s created. An succinct summary of the situation was provided by Richard F. Moody, chief economist of Regions Bank. He wrote yesterday that the new GDP data “embody the predicament facing the U.S. economy, which is that the supply side of the economy has simply been unable to keep pace with demand.” The result is not only the strong recent inflation figures, but a ballooning of personal spending’s share of the economy.

Moody expects that both problems will end “later rather than sooner,” and for all I know, he (and other inflation pessimists) are right. But unless you believe that West Coast ports will remain clogged forever, that semiconductors will remain in short supply forever, that truck drivers will remain scarce forever, that businesses will never adjust adequately to any of this, and/or that new CCP Virus variants will keep the whole economy on lockdown-related pins and needles forever, the important point is that these problems will end. Once they do, or when the end is in sight, we’ll be able to figure out just how bubbly the economy has or hasn’t grown – but not, I’m afraid, one moment sooner.

(What’s Left of) Our Economy: Glimmers of Trade Normality’s Return?

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CCP Virus, China, coronavirus, COVID 19, Donald Trump, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, real GDP, real trade deficit, recovery, services trade, tariffs, trade deficit, Wuhan virus, {What's Left of) Our Economy

Has the new post-CCP Virus trade normal finally started coming into view for the United States? One important reason for believing so came in today’s Commerce Department report on economic growth in the second quarter, and the main evidence can be summed up in these numbers: 31.81, 10.92, 8.24, and 2.69.

They represent the sequential rates of increase in the overall inflation-adjusted trade deficit starting with the third quarter of last year and ending with this year’s second quarter. And they show that even though real economic growth remained strong (albeit well below expectations) in the second quarter, the after-inflation trade gap’s size is stabilizing.

There’s no doubt that bottlenecks clogging transport systems all over the world due to the rapid recovery from CCP Virus-induced recessions deserve much of the credit. But given domestic manufacturing’s continued healthy growth despite the aforementioned supply chain and shortage issues, it’s hard to imagine that the Trump tariffs – especially on hundreds of billions of dollars worth of goods from China – haven’t played a big role, too.

But before diving into the gross domestic product (GDP) report’s trade highlights, it’s important to note that they reveal that the economy’s size in price-adjusted terms in the second quarter finally exceeded the scale reached in the fourth quarter of 2019 – the last fully pandemic-effect-free quarter. The nation’s total output of goods and services is only 0.81 percent greater, but it’s a start.

Also worth observing right away – the combined goods and services trade deficit of $1.2590 trillion at an annual rate was the fourth straight all-time record. That’s nearly 50 percent (48.54 percent, to be precise) higher than the fourth quarter, 2019 level of $847.6 billion, so obviously there’s a long way to go to pre-virus days by that standard. According to the more useful measure of the trade deficit’s size as a share of the GDP, the story’s only a little better. At the end of 2019, it stood at 4.41 percent, and in the second quarter of this year, it stood at 6.50 percent. So it’s up by 47.39 percent since the pandemic began significantly affecting the economy.

More progress toward normalization shows up in in the data on the impact of changes in the after-inflation trade shortfall on quarterly growth. For the second quarter of this year, the sequential growth in the real constant dollar trade deficit subtracted 0.44 percentage points from the 6.35 percent annualized expansion of the economy. In other words, had the real trade deficit not increased at all, real growth would have been 6.79 percent at annual rates, or 6.93 percent higher.

In the first quarter, the after-inflation trade deficit’s increase subtracted 1.56 percentage points from 6.14 percent real annualized growth. So that quarter’s after-inflation price-adjusted GDP rise would have been 7.70 percent at annual rates, or 25.41 percent greater. The final pre-pandemic numbers showed that a fourth quarter, 2019 inflation-adjusted trade deficit sequential decrease added 1.43 percentage points to 1.86 percent annualized growth.

Therefore, much ground needs to be made up here, too. At the same time, this particular set of data has been bouncing around a lot since former President Trump began his “trade wars” (in 2018), which led companies throughout the nation and world to adjust their production and especially import patterns dramatically in reactio not only to actual tariffs but to anticipated levies.

The new GDP release estimated that total after-inflation U.S. exports climbed by 1.47 percent sequentially during the second quarter – a reversal of the 0.73 percent quarterly decline during the previous three-month stretch. But at $2.2956 trillion annualized, they’re still 10.09 percent less than the fourth quarter, 2019 result.

Combined inflation-adjusted goods and services imports increased at a slower rate during the second quarter – 1.90 percent sequentially, versus 2.25 percent during the first quarter. But these U.S. purchases from abroad are 4.52 percent higher than just before the pandemic’s arrival. And the immediate pre-pandemic level had already been hit in the fourth quarter of last year.

Moreover, at $3.5547 trillion annualized, total real imports reached their second straight all-time quarterly high.

The constant dollar goods trade deficit level hit a new quarterly record, too – $1.4610 trillion at annual rates. Further, the all-time high was the fourth straight, and this trade gap is now 36.36 percent above the fourth quarter, 2019 pre-pandemic level.

At least this trade shortfall’s sequential growth rate has also been plummeting – from 20.40 percent in last year’s third quarter, when the economy was bursting out of the deep but short virus-and lockdown-induced recession, to 4.66 percent between the first and second quarters of this year.

The service sector continues to be a source of discouraging trade news according to the new GDP read. Its long-time after-inflation real surplus shrank by 6.20 percent between the first and second quarters, and in fact has fallen every quarter snce the second quarter of 2020. As a result, it’s currently 30.55 percent lower than it was in that final pre-CCP Virus fourth quarter of 2019.

Of course, as with the economy and life in general, U.S. trade’s return to normality still depends heavily on huge wildcards like the future of the CCP Virus Delta variant, and whether it will keep spreading fast and long enough to lead governments to reimpose shutdowns and lockdowns.  But the largely pre-Delta GDP numbers released today suggest that if this mutation stays under control, and nothing worse appears, America’s trade performance will keep approaching its pre-virus state.      

(What’s Left of) Our Economy: Let’s Hope the Lousy New U.S. Trade Figures are Transitory, Too

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Commerce Department, Donald Trump, exports, Federal Reserve, GDP, gross domestic product, imports, Jerome Powell, real GDP, real trade deficit, tariffs, Trade, trade deficit, West Coast ports, {What's Left of) Our Economy

No two ways about it. Until the longer term revisions come in, the first quarter of 2021 was a lousy one for inflation-adjusted U.S. trade flows – and lousy to a record extent. The only possible positive takeaway:  These numbers and the trends underlying them might be just as transitory and CCP Virus-induced as I (and many others)  believe today’s high inflation numbers are   

According to today’s final (for now) Commerce Department read on economic growth for the first three months of this year, the real gross domestic product (GDP – the government’s measure for the economy’s size) increased by 6.21 percent on an annual basis.

That’s an excellent figure although (like virtually all other economic data) it’s a considerably artificial number (because of the sudden reopening of the economy after equally sudden government-mandated shutdowns and resulting consumer caution), and although it’s a bit less than the 6.25 percent estimated last month. Indeed, it’s a big improvement over the 4.26 percent registered in the fourth quarter of last year

But the after-inflation trade deficit figures just keep rising – and reaching all-time highs. The initial read on this constant dollar trade gap for the first quarter was an annualized $1.1755 trillion. Last month, this figure was revised up to $1.1939 trillion. This morning’s result: $1.2123 trillion. Consequently, the price-adjusted first quarter trade deficit turns out to be 8.05 percent worse than the fourth quarter’s $1.1220 trillion.

Optimists can note that this sequential increase was smaller than the 10.12 percent rise between the third and fourth quarters of last year. But this slowdown is pretty modest.

Since the real trade deficit figure is higher than previously reported and grew faster, and the total economy grew slightly more slowly in inflation-adjusted terms, the trade shortfall’s bite into growth was bigger – 1.50 percent out of the 6.21 percent increase as opposed to the previously reported 1.25 percent out of 6.25 percent growth.

This means that, had the real trade deficit simply remain unchanged, the economy would have expanded 24.15 percent more after inflation in the first quarter. The previous GDP read yielded a figure of 20 percent.

In glass-half-full terms, that’s a smaller subtraction from growth than the multi-decade high 35.92 percent suffered in the fourth quarter. But it’s a lot of foregone growth nonetheless.

The constant dollar trade deficit as a share of GDP hit another new record, too – 6.35 percent. Upon recalling that the previous pre-pandemic high of 6.10 percent came in the fourth quarter of 2005, during the bubble whose bursting brought on the global financial crisis and ensuing Great Recession, that could be an ominous development.

And more bad news: The worsening of the real trade deficit came on both the export and import fronts in the first quarter. Today’s GDP report showed that inflation-adjusted U.S. overseas sales of goods and services dropped sequentially by 0.53 percent, while total American purchases from abroad increased by 2.30 percent.

So do these new figures foreshadow the new post-CCP Virus normal for U.S. trade – despite (or because of?) the Trump tariffs? We’ll find out more about the effects of trade policy once the next official monthly U.S. trade figures (for May) come out next Friday. 

For now, though (and probably after those new data), the most responsible answer I can provide is, “It’s too soon to tell.” Indeed, as if the U.S. economy still wasn’t being distorted enough by the rapid transition from pandemic-induced recession to robust expansion, and still facing enough consequent uncertainties, on top of the ongoing congestion at U.S. West Coast ports, a big logjam has emerged at a giant port in export-heavy China.

Last week, Federal Reserve Chair Jerome Powell noted that “This is an extraordinarily unusual time, and we really don’t have a template or any experience in a situation like this. We have to be humble about our ability to understand the data.” As the new U.S. GDP report should be making clear, American trade flows are no exception.

(What’s Left of) Our Economy: New GDP Figures Show Slower U.S. Trade Normalization

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CCP Virus, coronavirus, COVID 19, GDP, gross domestic product, inflation-adjusted growth, lockdowns, real GDP, real trade deficit, reopening, semiconductor shortage, trade deficit, West Coast ports, Wuhan virus, {What's Left of) Our Economy

When the the U.S. government’s first read on the economy’s growth during the first quarter of this year came out, I wrote that the trade highlights showed some tentative signs of normalization for CCP Virus-distorted flows of exports, imports, and for the resulting trade balances.

As of this morning, we have the second report on change between January and March in the gross domestic product (GDP), and the normalization trend still looks intact – but in weakened form.

The new data judged that first quarter growth in inflation-adjusted terms at an annual rate was a bit faster than previously estimated – 6.25 percent versus 6.24 percent. Yet the real combined goods and services trade deficit of $1.1939 billion annualized is 1.57 percent bigger than the quarterly record $1.1755 trillion reported a month ago.

As a result, the overall deficit a represented a 6.41 percent worsening from the fourth quarter figure, as opposed to the 4.77 percent increase previously reported. That’s still much lower than the 10.12 percent rise from the third quarter to the fourth quarter. And it’s orders of magnitude less than the 31.47 percent recorded during the spectacularly high growth second to third quarter period. But it’s definitely a step backward.

Ditto for the impact on after-inflation economic growth of the overall trade deficit’s increase. The initial read for the second quarter reported that the gap’s widening subtracted 0.87 percentage points from the 6.24 percent annualized total real GDP growth figure. In other words, constant dollar GDP growth would have been 13.94 percent greater had the real trade deficit not climbed at all.

Now the growth-killing impact of the trade shortfall’s expansion is pegged at 1.25 percentage points from 6.25 percent annualized price-adjusted economic growth. So that real GDP growth would have been 20 percent faster had the deficit not worsened. As with the increase in the deficit itself, the impact on growth of the deficit’s rise is smaller than it was in the fourth quarter – when it hit 35.92 percent for the worse, a multi-decade high. But the improvement is now a good deal smaller than first thought.

On a static basis, however, the inflation-adjusted adjusted total trade deficit’s share of the real economy keeps surging. This morning, it came in at 6.25 percent – as opposed to the 6.16 percent first reported. The fourth quarter level was only 5.97 percent and the third quarter’s just 5.48 percent.

Consequently, the real trade deficit is still bigger relative to the whole economy than during the fourth quarter of 2005, when it hit 6.10 percent. That incidentally was the previous record, and that time is of course known as the bubble decade – after which the financial crisis and Great Recession quickly followed.

Moreover, although signs of overall economic normalization keep mushrooming (thanks, e.g., to the spread of CCP Virus immunity and continued stimulus spending), trade flows may still be in for months more of pandemic-related distortions. Indeed, they may worsen.

After all, on top of all the stimulus the economy will keep receiving for the foreseeable future, two major bottlenecks crimping growth are easing. Specifically, progress is now being reported not only in clearing West Coast ports congestion, but in alleviating the global semiconductor shortage (albeit partly because the production cuts it forced on customers are cutting their demand).

It’s true that these bottlenecks – which have stemmed largely from the sudden stop-start nature of transitions from lockdowns to reopenings – have affected both U.S. exports and imports. But with the United States still a strongly consumer-dominated economy, and almost certain to recover much faster than many of its leading trade partners (many of which will therefore be relying on generating their own trade surpluses for growth more than ever), it’s all too easy to see how its trade deficits will either keep setting records or at least stay at their current lofty levels well into the next year.

Our So-Called Foreign Policy: More Reasons to Doubt Those “China Century” Predictions

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China, GDP, gross domestic product, Our So-Called Foreign Policy, per capita GDP, population, Taiwan, The Lancet

Predictions that China will soon overtake the United States as the world’s largest economy are now commonplace (see, e.g. here) – and understandably so given how much faster than America the People’s Republic has been growing in recent decades. As a result, I was startled six weeks ago when I came across data punching lots of holes in this forecast, and called attention to them in this post.

Still, as I explained, the implications were mainly economic – indicating that Americans and their businesses had much less to fear than widely supposed from a substantial U.S. decoupling from China because the Chinese people’s overall purchasing power would be hard-pressed to keep growing nearly as fast as generally assumed. That was because China’s gross domestic product (GDP) per capita – the amount of wealth it was creating for each of its huge, one billion-plus population – was growing at distinctly unimpressive levels. In fact, it was 

In terms of overall national power, however, and China’s consequent ability to threaten American national security, I noted that plenty of reasons for worry remained – because the narrowing of the U.S.-China gap in terms of the actual sizes of their economies meant that China’s ability to pour resources into its military and its security-related tech industries continued to threaten to surpass America’s.

But this week, new figures – on China’s population – have called these concerns into question, too, at least over the long run.

The data – China’s own new census – revealed that the People’s Republic’s population growth has slowed to a crawl. The numbers bested some forecasts – which anticipated Beijing reporting an actual population decline. But because this near-population stagnation has resulted largely from trends unlikely to be reversed any time soon (mainly the regime’s draconian multi-decade population control policies and the major rise in living standards that China unquestionably has achieved), they also add to the evidence that the People’s Republic is heading into a period of long-term population shrinkage. In turn, this fall-off – coupled with the weak China per capita GDP growth mentioned above – indicates that its world’s biggest economy status could be surprisingly short-lived.

The math underlying this analysis is pretty simple – and since the time frames are long, the specific results should by no means be taken literally. But the story they tell differs so dramatically from the current conventional wisdom, and because one of the key assumptions looks conservative, they deserve to be taken seriously.

Let’s begin with those per capita GDP figures. According to the World Bank, in 2019, it was $65,298 for the United States, and $10,217 for China. And let’s look at recent population predictions that have attracted considerable attention. They come from the prominent medical journal The Lancet, and peg the U.S. population growing by some three percent between 2017 and 2100, and hitting 335.81 million, but China’s population falling during the same period to just 732.89 million – a nosedive of nearly 50 percent.

That’s stunning enough by itself, but take a look at what these numbers would do to the two countries’ GDPs. Let’s assume that America’s GDP per capita in 2100 stays at its 2019 level of $65,298. Multiply that by the 335.81 million U.S. population, and you get an economy whose total output is $21.93 trillion (before accounting for inflation). If China’s GDP per capita stays the same, this calculation produces a GDP for the People’s Republic of just $7.48 trillion before inflation That is, its economy would be just a third the size of America’s. Moreover, this means that the economy gap will have doubled, since China’s $14.280 trillion GDP as of 2019 was two-thirds the size of America’s $21.433 trillion (again, according to the World Bank).

Granted any number of non-economic and economic developments over the next eight decades could make this scenario completely meaningless. But leaving out those utter unknowables, it’s significsnt that one plausible knowable suggests that the U.S.-China economy gap may become even bigger in 2100. And that’s the fact that the data I cited in March (from the International Monetary Fund) show that since 1980, that U.S.-China per capita GDP gap has widened substantially. If that trend continues (as opposed to per capita GDP differences staying exactly where they are now, as my scenario assumes), then by the turn of the next century, the United States would stand even further ahead of China. In principle, the military potential gap would widen strongly as well.

And just as crucial to keep in mind: If China’s population plummets by nearly half by 2100, big time decline will have to have begun long before, which translates into a relatively brief spell of Chinese superiority in terms of that military potential. Further, this Chinese edge may be even more fleeting than these dry numbers indicate, since the United States by all accounts maintains Number One in that regard now, and military potential doesn’t turn into military strength overnight.

Nonetheless, there’s still a worrisome paradox to keep in mind. Precisely because China’s long-term prospects aren’t terrific, some leading strategists (see, e.g., here and here) argue that Beijing will be sorely tempted to capitalize on its relative gains to date and momentum to achieve high priority goals in the short-term – like taking over Taiwan.

I personally have no idea. And I’m the last person to preach complacency in China policy. In fact, I’m glad to see that the American political system has begun wakening to the dangers posed by China’s economic, technological, and military advances. But excessive pessimism has never led to any victories in any kind of struggle or competition, either, and hopefully The Lancet data will reinforce U.S. leaders’ confidence that if success in handling China isn’t guaranteed, it’s entirely achievable.

(What’s Left of) Our Economy: New U.S. GDP Figures Report Record – and Virus-Distorted – Trade Deficits

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CCP Virus, Commerce Department, coronavirus, COVID 19, Donald Trump, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, real GDP, real trade deficit, recession, recovery, services trade, Trade, trade deficit, {What's Left of) Our Economy

Because the entire U.S. economy has been so distorted by sudden stop-start nature of the CCP Virus and subsequent lockdowns and reopenings, and massive government stimulus measures, I’ve been hesitant to draw firm conclusions about the messages sent by the various reports on the economy’s performance issued by the government since the pandemic arrived.

I’m still hesitant, but this morning’s Commerce Department report on the economy’s growth in the first quarter of this year seemed especially interesting due to the signs it contained that America’s trade flows might be returning to some semblance of normality. The signs consist of quarter-to-quarter changes in deficits, exports, and imports that are decidedly moderating.

To start, that conclusion is also consistent with the moderating of changes in economic growth itself. Measured in inflation-adjusted terms, this intiial read on America’s gross domestic product (GDP – the total of goods and services turned out by the nation) revealed growth of 6.24 percent at an annual rate in the first quarter. By the standards of normal times recent decades, this is a blistering pace. In fact, leaving out the pandemic period, it was the best such performance since the 6.80 percent achieved in the third quarter of 2003.

But by pandemic standards, although it’s a speed up from the 4.26 percent registered in the fourth quarter of last year, it’s not that much of a speed up, especially given how much stimulus has been poured into the economy. And compared with the 29.91 percent real GDP pop in last year’s third quarter, however, it’s definitely smallish beans.

The trade figures comprising part of this GDP report generally followed suit. For example, the first quarter’s after-inflation trade deficit of $1.1755 trillion was an all-time quarterly record both in absolute terms, and more important, as a share of the whole economy (6.16 percent). The last time the trade deficit’s relative size was remotely that big was during the fourth quarter of 2005 (6.10 percent) – during a time now known as the bubble decade that preceded the financial crisis and Great Recession of 2007-2009.

Yet the deficit’s quarter-to-quarter growth rate of 4.77 percent was considerably slower than the fourth quarter’s 10.12 percent, and the record (by a long shot) 31.47 percent recorded during that extraordinarily high growth third quarter.

The same pattern is unfolding so far with the trade gap in goods. At $1.3463 trillion annualized it marked the third straight quarterly record in absolute terms. But the sequential growth rate of 3.46 percent was well off quarterly the rate of 6.94 percent in the fourth quarter, much less the 21.58 percent in the third quarter.

Trade in services – the part of the national and global economies hardest hit by the virus and the lockdowns – has taken less of a straight line route in terms of quarterly change, but moderation can be seen here, too. The quarterly surplus of $165.1 million was the smallest recorded since the $1.57 million during the third quarter of 2009 – when the economy was just beginning to crawl out of the Great Recession.

The quarterly shrinkage of 4.95 percent was, though, As less than a third as great as the fourth quarter’s 17.29 percent – though that nosedive was greater than the third quarter’s 10.48 percent.

Approaching normality was also indicated by another trade-related figure – the degree to which these changes in the deficit have affected overall growth. During the first quarter of this year, the sequential rise of the price-adjusted trade deficit subtracted 0.87 percentage points from annualized real GDP growth figure, which hit 6.24 percent. So that trade shortfall increase affected 13.94 percent of the growth figure (for the worse).

As discouraging as that result was, however, the trade effect was much smaller than in the fourth quarter of last year. Then, the big surge in the inflation-adjusted trade gap cut 1.53 percentage points from real GDP growth, which hit 4.26 percent annualized. In other words, the trade deficit affected 35.92 percent of the growth figure (again for the worse).

The trade affect was actually smaller in relative terms during the record GDP growth third quarter – reducing real GDP expansion, which neared 30 percent at annual rates, by 3.21 percentage points.

But for some context, the last time the trade hit to real economic growth was seen in this statistical neighborhood was the third quarter of 1982, when dragged down a sequential after-inflation contraction of 1.53 percent by 3.22 percentage points. That is, without the increase in the trade deficit, the overall economy would have grown. And the all-time record was set way back in the fourth quarter of 1947 – when a rising trade shortfall cut 4.23 percentage points out of a growth rate that his 6.25 percent annualized.

Larger trade effects have been seen occasionally when a quarterly improvement in the deficit bolstered growth. But these instances came during deep downturns – as in the second quarter of 1980 and the first quarter of 1975.

Nevertheless, a case can be made that the CCP Virus related distortions of the economy and U.S. trade flows still have a ways to go. After all, more massive government stimulus seems to be coming, and new pandemic waves are washing over major portions of Europe and Asia, which of course are important American export markets. And until the roller coaster ride is over, assessing the true state of the economy and trade flows will remain a serious challenge.

Moreover, even if the distortions are indeed over, these particular trade figures are of little help in assessing the ongoing impact of the Trump trade policy revolution engineered from 2017 to last year.  Luckily, the next set of needed details is due out next Tuesday, when the March monthly trade report is slated to be released.      

(What’s Left of) Our Economy: The Real U.S. 2020 Trade Deficit Remained a Record – & Virus-Distorted

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CCP Virus, coronavirus, COVID 19, exports, GDP, global financial crisis, goods trade, Great Recession, gross domestic product, imports, inflation-adjusted growth, real GDP, real trade deficit, recession, services trade, Trade, trade deficit, Wuhan virus, {What's Left of) Our Economy

The final (for now) official report on U.S. economic growth in the fourth quarter of last year and therefore for the full year contained modestly good news both in terms of the entire economy’s performance and its trade flows, but doesn change the big picture of major pandemic-related setbacks and distortions, and the latter likely to continue for the foreseeable future.

Starting at 30,000 feet, the new data show that in inflation-adjusted terms (those most closely watched), America’s gross domestic product (GDP – or the total of goods and services it produces) shrank by 3.49 percent in 2020, a bit better than the 3.50 percent decline reported last month. Real growth received a boost from a fourth quarter during which real GDP expanded sequentially by 4.23 percent at an annual rate, not the (already upwardly revised) 4.03 percent previously estimated.

Given the record nosedive last spring produced by the CCP Virus and related mandated and voluntary curbs on economic activity, and even given the strong (in fact, sequential, record) rebound in the third quarter, such growth isn’t overly impressive. But presumably the rate will accelerate as vaccination spreads, herd immunity finally arrives, lockdowns are lifted (hopefully for good), and consumer regain confidence about in-person services like dining and traveling.

All the same, 2020’s still ranks as the worst U.S. economic downturn since 1946, when after-inflation GDP tumble by 11.60 percent as the nation transitioned from a war-time to a peacetime footing. Last year’s recession was also worse than the real GDP drop of 2009 (2.53 percent), during the Great Recession triggered by the global financial crisis.

As for the constant dollar total trade deficit, it’s now pegged at $926 billion, up slightly from last month’s reported $925.8 billion, but better than the $926.3 billion estimated in the first read on fourth quarter and 2020 GDP. The annual increase was only 0.92 percent, and as a share of the total economy (5.03 percent), it remained well below the all-time high of 5.95 percent (which came at the height of the bubble decade, in 2005), the deficit’s absolute and relative levels are still remarkable given the economy’s contraction – which normally results in a trade deficit decrease. At the same time, as will be discussed below, the 2020 recession was unusual in most respects.

The trade highlights of this morning’s GDP report confirmed once again that the service sector has suffered the greatest pandemic period hit both domestically and internationally. Indeed, during 2020, the longstanding after-inflation American goods trade deficit dipped by 0.71 percent (from $1.1409 trillion to $1.1328 trillion) while the equally longstanding services surplus sank by eleven percent (from $224.5 billion to $199.8 billion).

The new GDP report upgraded America’s total price-adjusted export performance in 2020, estimating their decline to be 12.95 percent, not the previously judged 12.97 percent. But the decrease is still the worst since 1958’s 13.49 percent plunge, and the $2.2169 trillion level remains the lowest since 2012’s $2.1930 trillion.

Real goods exports in 2020 slid by 9.46 percent in today’s GDP report – a little better than the 9.48 percent calculated last month. But as with total exports, these levels still represented multi-year lows in terms of the magnitude of the decline (the fastest since Great Recession-y 2009) and the absolute amount ($1.6138 trillion, the lowest since 2013). As last months real GDP post reminded, though, goods and services trade figures began to be reported separately by the Commerce Department only since 2002.

The deterioration in real services exports was, again, much more dramatic, and faster than estimated in last month’s GDP figures. They plummeted by 19.26 percent on-year, not the 19.16 percent previously reported, and a record by a long shot. And at $620.5 billion, their yearly total is the lowest since 2010.

Total constant dollar U.S. imports, however, seem to have fallen sligthly more slowly last year (9.27 percent) than previously judged (an already downgraded 9.28 percent). Yet this decrease also remained the fastest since 2009, and the $3.1429 trillion level the lowest since 2015.

Consistent with the above results, the inflation-adjusted goods imports fall-off in 2020 was much less than the overall decline. Interestingly, the new 6.05 percent annual decline reported this morning was notably lower than the 5.45 percent decrease reported last month. It, too, however, was a multi-year worst (since recession-y 2009) and the new $2.7466 trillion level is the lowest since 2016.

The annual after-inflation services imports drop in 2020 reported today was unchanged, at a record 22.54 percent, and the same $420.7 billion level was the weakest since 2009.

On a quarter-to-quarter basis, the real trade deficit registered modest improvement, too. Previously pegged at a quarterly record $1.1230 trillion on an annual basis, it’s now estimated at $1.1220 trillion (still an all-time high), and the sequential increase downgraded from 10.20 percent to 10.11 percent.

Two other findings of note: Although the increase in the annual constant dollar total trade deficit reached an all-time high last year, its effect on economic performance was relatively slight. The trade gap’s widening accounted for 0.14 percentage points of that 3.49 percent annual real GDP drop. Proportionately, that’s less damage than was inflicted in 2019, when the higher trade deficit cut 0.18 percentage points from the 2.16 percent overall growth rate.

On a quarterly basis, though, the trade bite was much deeper, as the price-adjusted total deficit’s increase subtracted 1.53 percentage points from the 4.23 percent sequential inflation-adjusted annualized GDP increase. But not even this blow was the biggest ever relatively speaking – or even close. (The all-time worst such performance came in the second quarter of 1952, when 0.85 percent after-inflation annualized growth would have been 2.23 percentage points higher if not for the sequential increase in the trade deficit.)