(What’s Left of) Our Economy: The New GDP Report Confirmed the Good News Trump Trade Story

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GDP, gross domestic product, inflation-adjusted growth, real GDP, real growth, real trade deficit, tariffs, Trade, trade deficit, Trump, {What's Left of) Our Economy

The U.S. government’s second look at the gross domestic product (GDP) for the first quarter of the year, which came out yesterday, didn’t significantly change the message sent by last month’s initial read on the economic impact of President Trump’s tariff-centric trade policies so far – and that’s good news for anyone who’s not afflicted with Trump Derangement Syndrome. (Actually, if extreme Never Trump-ers’ well-being is tied to the American economy’s, it’s good news for them, too, in real life.)

This newest look provides yet more evidence that Mr. Trump’s long overdue overhaul of the nation’s approach to trade – no doubt coupled with other measures like regulatory reform and possibly the tax cuts – is enabling the economy to grow in a healthy, sustainable way. Specifically, the economy’s overall inflation-adjusted growth (the measure that attracts the most attention) has not only been strong. It’s become stronger than the growth of America’s still oversized, debt-producing trade deficits.

The quarter-to-quarter results show this trend emphatically. According to the second GDP read, the economy grew at a price-adjusted annual rate of 3.03 percent in the first quarter of this year. That’s down only slightly from the 3.13 percent real growth previously reported, and considerably faster than the 2.15 percent results for the fourth quarter of last year.

But during that first quarter, the after-inflation overall trade deficit dropped by 5.45 percent. That’s a bit less than the 5.90 percent sequential drop found in the last month’s GDP report (because the trade shortfall was revised slightly higher), but still considerable given the rapid overall expansion. And it’s a major turnaround from the 0.63 constant dollar trade deficit increase between the third and fourth quarters of last year.

All the same, one quarter does not a trend make. That’s why it’s crucial to note that developments over longer time-frames also support optimism about the Trump trade policies’ results. And as previously shown, the most revealing comparison is between the last high growth period recorded by the economy during President Obama’s administration, and the current Trump surge.

Despite the marginal reduction in the first quarter’s real growth figure, it still leaves after-inflation expansion over the last four data quarters at 3.18 percent. That’s the fastest such growth since the 3.37 percent recorded between the second quarter of 2014 and the second quarter of 2015.

But during that Obama-era growth spurt, the real U.S. trade deficit increased by 21.55 percent. During the current Trump high growth period, this trade gap is up only 0.13 percent so far.

Some other trade-related highlights of the new read on first quarter GDP:

>In absolute terms, the inflation-adjusted overall trade deficit for the first quarter was revised up from $899.3 billion to $903.6 billion. That’s the lowest level since the second quarter, 2018’s $841.0 billion.

>Consequently, the real trade deficit as a share of price-adjusted GDP stood at 4.78 percent, not the 4.76 percent reported in the advance GDP release. That’s still the lowest such number since the second quarter of 2018’s 4.54 percent.

>Trade’s contribution to economic growth in the first quarter remained at its best level in years. In the advance read, the sequential shrinkage of the constant-dollar trade deficit fueled 1.03 percentage points of 3.13 percent annualized growth. As of the new GDP report, these figures stood at 0.96 percentage points of 2.03 percent growth.

In other words, the trade deficit’s improvement accounted for 31.64 percent of the first quarter’s real growth. That’s down from the 32.91 percent figure from the initial read on first quarter GDP, but still the highest such figure since 38.56 percent of the fourth quarter of 2013 (when a reduction in the inflation-adjusted trade deficit fueled 1.23 percentage points of its 3.19 percent annualized growth.

>Because total goods and services exports were revised slightly higher (from $2.5765 trillion annualized to $2.5836 trillion), they remained at record levels.

>Real goods exports exports were estimated to be slightly higher, too – $1.8028 trillion annualized instead of $1.7598 trillion. But that’s still only the second best total on record (after the $1.8092 trillion in the second quarter of 2018).

>After-inflation services exports were also upgraded slightly – from $783.2 billion annualized to $783.6 billion. That still represents their fifth straight quarterly record.

>First quarter constant dollar total imports are still estimated to have fallen sequentially in the first quarter, but only to $3.4871 trillion annualized, not to $3.4758 trillion. That upward revision still left them as representing the third highest level on record.

>The same story unfolded for after-inflation goods imports. Their quarterly drop left them at $2.9229 trillion annualized, not $2.9131 trillion – also a third all-time highest level.

>Real services imports, however, came in higher than the $562.2 billion at annual rates previously reported. The new $563.8 billion total represented a new record.

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(What’s Left of) Our Economy: More Evidence that U.S. Growth is Healthier Under Trump

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Barack Obama, GDP, Great Recession, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, real growth, recovery, toxic combination, Trump, {What's Left of) Our Economy

The current U.S. economic recovery has lasted so long (at more than ten years old, it’s already tied with the 1990s expansion as the longest on record), that anxiety about how long it might last, and when a new recession might begin, is entirely understandable. Yet what most economy watchers keep missing is what RealityChek regulars have understood for years – the quality of America’s growth matters at least as much as the quantity.

As a result, the latest government report shedding light on this growth – the preliminary look at the gross domestic product (GDP) for the first quarter of this year – was important not only for revealing that the economy expanded at a healthy 3.21 percent at an annual rate. It was also important for showing that by several crucial measures, the growth recipe was by far the healthiest since at least the period during which United States enjoyed its last period of robust expansion – back in 2014 and 2015.

The definition of healthy growth used by RealityChek is growth that depends relatively little on increases in personal consumption and housing investment. Those segments of the GDP and their bloat were most responsible for inflating the previous decades’ bubbles that burst so disastrously in 2007 and 2008, nearly blew up the entire global economy, and triggered the worst national economic downturn since the Great Depression of the 1930s. Fortunately, the GDP data compiled by the Commerce Department make it easy to calculate how their current growth contribution compares with their past record. And, as with the latest trade figures, they show that progress towards improving growth’s health has been dramatic so far during President Trump’s administration.

In particular, during that previous high growth period (under President Obama), the economy’s quarterly expansion ranged from 2.60 percent at an annual rate to 3.81 percent after inflation. But the growth contributions made by personal consumption and housing (which I’ve called a “toxic combination”) generally ranged from 62.86 percent to 79.70 percent (with one outlier quarter – the fourth of 2014 – coming in at nearly 187 percent, meaning that other elements of the GDP worked to shrink the economy).

During the high growth period under President Trump, which began in the first quarter of 2018, inflation-adjusted quarterly GDP has actually risen by a somewhat slower pace: between 2.58 percent annualized and that 3.21 percent rate of the first quarter of this year. But the contributions made by the toxic combination have ranged only from ten percent to 67.27 percent. And the figure for that high-growth first quarter of this year was only 22.19 percent.

Also worth noting are the growth rates during the Obama years when the role of the toxic combination was within that Trump range. They were somewhat lower.

Principally, in the second and third quarters of 2014, the toxic combination’s combined real growth contribution was 65.69 percent and 62.86 percent, respectively. Annualized constant dollar growth during those quarters was 2.60 percent and 3.04 percent. Those are solid results, but not quite as good as those from the second, third, and fourth quarters of 2018. Then, the toxic combination’s growth contribution ranged between 60 percent and 67.27 percent, and growth ranged from 2.87 percent to three percent.

As indicated above, these results can be pretty volatile from quarter to quarter. But smoothing them out by using annual figures tells a story even more favorable to the Trump record. Here are those annual figures starting with 2009-10, the first recovery year.

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

09-10:          1.20/2.60       -0.08/2.60         1.12/2.60         46.92%         2.56%

10-11:          1.29/1.60        0.00/1.60         1.29/1.60         80.63%         1.55%

11-12:          1.03/2.20        0.31/2.20         1.34/2.20         60.91%         2.25%

12-13:          0.99/1.80        0.34/1.80         1.33/1.80         73.89%         1.84%

13-14:          1.97/2.50        0.12/1.80         2.09/1.80       116.11%         2.45%

14-15:          2.50/2.90        0.33/2.90         2.83/2.90         97.59%        2.88%

15-16:          1.85/1.60        0.23/1.60         2.08/1.60      130.00%         1.57%

16-17:          1.73/2.20        0.13/2.20         1.86/2.20        84.55%         2.22%

17-18           1.80/2.90      -0.01/2.90         1.79/2.90        61.72%          2.86%

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

As with the quarterly figures, during the Obama years, when the growth contribution of the toxic combination was low, so was growth.  During the two full Trump data years, as growth itself sped up, the toxic combination’s contribution has plummeted to multi-year (at least) lows.

But a big question remains unanswered: When, under the Obama administration, the economy did manage to grow satisfactorily with a relatively small contribution by the toxic combination, this health growth recipe didn’t last. Indeed, by the third quarter of 2015, growth itself began slowing markedly, until it bottomed at 1.30 annualized in the second quarter of 2016. And it never broke two percent again. But the toxic combination’s contributions during that decelerating growth period ranged from 91.05 percent to a stunning 430 percent (in the fourth quarter of 2015).

The Trump years’ much better performance in this respect has lasted only two years. Only if this strengthening proves to have legs will it be legitimate to start considering the economy genuinely Great Again.

(What’s Left of) Our Economy: New Trade Data Confirm that U.S. Growth Keeps Getting Healthier Under Trump

Tags

GDP, gross domestic product, Made in Washington trade deficit, non-oil goods trade deficit, real GDP, real growth, Trade, trade deficit, Trump, {What's Left of) Our Economy

This morning’s monthly U.S. trade figures (for March) enable an update for the economic impact of President Trump’s tariff-centric trade policies – and contain very good news both for Mr. Trump and for anyone hoping that the nation’s growth becomes healthier (which should be all Americans).

The major test, as RealityChek regulars know, is a comparison between the economy’s overall growth on the one hand, and the growth of the trade shortfall most heavily influenced by trade policies. The latter can be termed the “Made in Washington trade deficit,” since it strips out oil (which is rarely the object of trade deals or trade policy decisions) and services (where trade liberalization has made only limited progress).

If the economy is growing faster than this non-oil goods deficit (in inflation-adjusted terms – the gauge most closely followed by economy watchers), or if its growth rate is still slower but the gap between these rates is narrowing, that means that its expansion is at least starting to stem more from domestic production, and less from import-led (and therefore debt-financed) consumption. If the trends are showing the opposite results, then overall growth is becoming still more heavily reliant on credit-financed shopping (whether by households, businesses, governments or some combination of these).

And in case you forgot, that’s the kind of growth that led directly to the last global financial crisis and the worst American recession since the Great Depression. And even though the economy began recovering a decade ago, its expansion consistently trailed the growth rate of the Made in Washington trade deficit – and never more than when the inflation-adjusted gross domestic product was increasing most robustly.

That’s why the new U.S. trade figures are so encouraging. They confirm that the American economy recently has been able to grow impressively without supercharged Made in Washington trade deficits. In fact, that’s way understating the case. For calculations based on the March trade results show that, during the first quarter of this year, the after-inflation Made in Washington trade deficit actually shrunk sequentially (by a 6.09 percent annual rate) while real gross domestic product increased by a healthy 3.13 percent annualized.

Nor was the first quarter a fluke – at least not under the Trump administration. In the second quarter of 2018, the real Made in Washington trade shortfall sank sequentially by 5.90 percent annualized, while the overall economy surged by a price-adjusted 4.10 percent.

And an examination of the two during the current economic recovery produces an unmistakable pattern, which is best illustrated by looking at the far-right column (think of it as the multiple) of the table below: During the Trump years so far, good growth has resulted despite relatively modest increases (and, as we’ve just seen, despite some absolute declines) in the Made in Washington trade deficit. During the Obama years, Trump-like growth was only achieved when the Made in Washington trade deficit practically exploded. And when that trade deficit grew weakly, so did the gross domestic product.

Further, even though the multiple rose between the first and second years of the Trump administration, the quarterly 2018 figures show that this problem stemmed from the tariff front-running of the third quarter – when U.S. importers were scrambling to bring in products from abroad before they were hit with levies, principally on goods from China. Once this period of distortion ended, the multiple fell significantly (and probably overshot in the first quarter of this year).

Real Made in Washington trade deficit        Real GDP         Ratio of first to second

1Q 2019:              -6.09 percent                   3.13 percent                 -1.95:1

4Q 2018:               6.41 percent                   2.15 percent                  2.98:1

3Q 2018:             11.66 percent                   3.31 percent                  3.52:1

2Q 2018:             -5.90 percent                    4.10 percent                -1.44:1

1Q 2018:              1.35 percent                    2.20 percent                 0.61:1

2018:                  12.74 percent                    2.86 percent                 4.45:1

2017:                    6.75 percent                    2.22 percent                 3.04:1

2016:                    2.66 percent                    1.57 percent                 1.69:1

2015:                  22.63 percent                    2.88 percent                 7.86:1

2014:                  15.88 percent                    2.45 percent                 6.48:1

2013:                    6.15 percent                    1.84 percent                 3.34:1

2012:                 10.23 percent                     2.25 percent                 4.57:1

2011:                 11.92 percent                     1.55 percent                 7.69:1

2010:                30.71 percent                      2.56 percent              12.00:1

Another way to compare the Obama and Trump years in this respect: As previously noted on RealityChek, the constant dollar 3.21 percent GDP growth registered between the first quarter of 2018 and the first quarter of 2019 was the best such four-quarter growth stretch since the second quarter of 2014 and the second quarter of 2015 (when real growth was 3.37 percent).

Yet during that Obama high growth period, the real Made in Washington trade deficit shot up by 18.83 percent. During the Trump high growth period, this trade shortfall rose by only 4.99 percent.

The higher and broader tariffs on China threatened by the President to press Beijing in the current trade talks would represent the biggest test yet of the Trump policies’ impact on the health of America’s growth. But the March trade figures are the latest evidence that so far, they’ve passed such tests with flying colors.

(What’s Left of) Our Economy: The Latest Sign of Trump Success on Trade

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exports, GDP, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, non-oil goods trade deficit, real exports, real GDP, real growth, real imports, real non-oil goods trade deficit, real trade deficit, tariffs, Trade, trade deficit, Trump, {What's Left of) Our Economy

It’s still not possible to say confidently that the impact of tariff-related distortions are over (at least for the foreseeable future), and that President Trump’s trade policies are once again enabling the U.S. economy to grow strongly faster than its debt-producing trade deficits (i.e., more healthily and sustainably). That moment won’t arrive until May 9, when the last of the monthly trade figures for the first quarter of this year will be reported (at least in a preliminary form).

But Friday’s initial first quarter results for the gross domestic product (GDP – the main measure of the economy’s size and its growth), bring the moment a good deal closer.

Just to recap the main issue: I’ve explained on RealityChek (e.g., here) and elsewhere (e.g., here) that the real measure of Mr. Trump’s trade policy success or failure isn’t the level of U.S. trade deficits presented in isolation. It’s whether the economy can grow at adequate rates without pulling in ever more imports – which are both bought by consumers and used by producers as parts, components, and materials for their final products. Either way, though, their increases on net plunge America deeper and deeper into debt.

With anything as big as the American economy, trends don’t reverse themselves quickly. So the best evidence of change would indicate that the relevant arc is starting to bend in the right direction. In this case, that means signs that growth becomes or remains adequate as the growth of the trade deficit slows. That’s exactly the story that could be told convincingly with some of the latest releases of trade-related numbers (see, e.g., here and here), and that the new first quarter GDP results strengthened further.

First, it’s important to note that the new advance data show that, after adjusting for inflation, as of the first quarter, the U.S. economy grew at its fastest pace over a four-quarter period (3.21 percent) since the second quarter, 2014-second quarter, 2015 period (3.37 percent).

But the first sign that the new growth has been healthier growth emerges when the change in the real trade deficit is examined. During that previous, somewhat faster, growth period, the price-adjusted trade gap widened by 21.55 percent. During the last growth period, which was only slightly slower, the trade deficit actually shrank slightly – by 0.34 percent.

As known by RealityChek regulars, though, changes in the overall real trade deficit have only limited utility for judging the usefulness of American trade policy because the total flows include oil and services trade. The first is rarely the subject of trade diplomacy or policy-making, and liberalization of the latter has made only embryonic progress so far.

The portion of the trade shortfall most heavily influenced by trade policy decisions is that in non-oil goods – what I’ve called the Made in Washington trade deficit. Unfortunately, exact comparisons between the 2014-15 and 2018-19 growth periods can’t yet be made because even the preliminary results for the first quarter of this year won’t be published until the March trade data are released on May 9.

But between the second quarter of 2014 and the second quarter of 2015, the Made in Washington trade deficit jumped by 18.83 percent. Between the first two months of 2018 and the first two months of 2019, it increased by only 3.17 percent. And because of the fading of the tariff front-running effect (described in this post), it’s highly unlikely that the March and full first quarter numbers will change this arc significantly.

The improving trade deficit and its contribution to healthier economic performance also can be seen by examining the contribution made by that better balance to quarterly growth. In the first quarter of 2019, the 5.90 percent sequential shrinkage of the trade gap was responsible for 1.03 percentage points of the 3.13 percent annualized sequential growth. That’s 32.91 percent of the total – and the highest such figure since the fourth quarter of 2013, when the trade deficit’s decrease fueled 1.23 percent points of the 3.19 percent annualized sequential growth (38.56 percent).

Some other trade-related highlights of the new GDP report:

>Combined goods and services exports in the first quarter hit a new record of $2.5765 trillion at an annual rate.

>Real goods exports were up, too, quarter-to-quarter. But their $1.7598 trillion annualized first quarter total was only the second all-time highest (after the $1.8092 trillion in the second quarter of 2018).

>After-inflation services exports represented a fifth straight quarterly record ($783.2 billion annualized).

>Constant dollar total imports in the first quarter fell on-quarter but they still represented the third highest total on record – $3.4758 trillion at an annual rate.

>After-inflation goods imports also fell sequentially to their third highest all-time level – $2.9131 trillion.

>Real services imports dropped quarter-to-quarter to their second highest all-time level – $563.3 billion.

(What’s Left of) Our Economy: The New Data Contain More Good Trade News for Trump – & the Economy

Tags

China, economic growth, GDP, goods trade deficit, gross domestic product, Made in Washington trade deficit, manufacturing, merchandise trade deficit, non-oil goods trade deficit, Trade, trade deficit, Trump, {What's Left of) Our Economy

The most reasonable conclusion to draw from today’s new U.S. trade figures (which cover February) is that, although evidence keeps growing that President Trump’s trade policies are returning to a success track, even only a fairly clearcut verdict won’t be possible until the March numbers come in.

The reason? By then, we’ll get at least the preliminary official read on the gross domestic product (GDP) for the first quarter of this year, and that will enable some significant light to be shed on a crucial (but almost completely ignored) measure of the Trump trade record – whether on his watch so far, the economy has been able to break or at least change the relationship between the growth of various measures of the trade deficit on the one hand, and overall economic growth on the other.

The answer matters because most economists have long insisted that an expanding economy and an improving trade balance almost never coexist. That claim is belied by the data, but the belief persists.

Further, good growth accompanied by better trade numbers would be of much more than academic interest. For the weaker the relationship between the worsening of the trade deficit and the growth of the economy, the more American growth would be stemming from domestic production, rather than domestic spending and borrowing, and vice versa.

As of the middle of last year, the economy had shown signs of notable progress along these lines. But in the last few months, as serious Trump tariffs on metals and especially on goods from China came on stream, the data started being distorted by front-running – i.e., importers rushing to procure affected goods before the levies kicked in and their prices rose.

Last month’s trade statistics contained important signs that these effects were ebbing, and the trend continued this month.  (A second distortion, however, is influencing these results – the China business slowdown that takes place each year with the arrival of the spring holiday.) All the same, January’s initially reported 14.61 percent monthly drop in the total trade gap (the biggest such decrease since March) was followed by a 3.43 percent decline in February (and from a January level that was revised down slightly). And at $49.38 billion, the overall trade shortfall was the smallest for a single month since last July’s $51.44 billion.

Meanwhile, the total two-month fall-off in the total trade gap (17.56 percent) was the biggest such decrease since March-May, 2015 (20.50 percent). And this is where we come to the main unknown: How do these instances of trade deficit shrinkage compare with the economy’s overall performance? Although Washington doesn’t track GDP on a monthly basis, it’s worth noting that from the second quarter of 2015 to the third quarter (the period roughly corresponding with that earlier trade deficit narrowing, growth on a pre-inflation annualized basis was 1.40 percent.

What about such growth during the first part of this year? That’s the figure we’ll need to wait for until later this month. At the same time, even then, an even more important question will remain unanswered for a while longer: Can the combination of an improved trade performance and continued growth last? In 2015, it was short-lived. Indeed, the current dollar U.S. economic growth rate in full-year, 2016 (2.44 percent) was less than half of the full-year, 2015 pace (5.07 percent). Unfortunately, the durability of this trend won’t be known for many more months at a minimum.

Nonetheless, there’s an even more rigorous test that the Trump trade policies need to pass – whether they can manage to maintain healthy overall economic growth while encouraging a reduction in that portion of the U.S. trade deficit that’s strongly influenced by trade policy decisions in the first place. As known by RealityChek regulars, that Made in Washington trade deficit strips out oil (because it’s almost never the subject of trade policymaking) and services (because trade liberalization of that activity remains in its infancy). On this front, signs of Trump trade progress haven’t shown up yet.

From January-February, 2017 (a period during which the Trump presidency began) to January-February, 2018, this Made in Washington deficit rose at the considerable pace of 18.47 percent. On the imperfect first-quarter-to-first-quarter basis, pre-inflation GDP was up 4.58 percent. That ratio was actually worse than during former President Barack Obama’s last year in office. Then, GDP expanded by 4.09 percent but the Made in Washington deficit actually dipped – by 0.50 percent.

As with the overall trade deficit, the Obama years sometimes witnessed strong economic growth during which the Made in Washington trade deficit worsened only moderately. For example, between the first quarters of 2011 and 2012, current dollar GDP improved by 4.80 percent and the Made in Washington trade deficit only widened by 9.80 percent. But growth slowed sharply thereafter. The January-February, 2009 to January-February, 2010 period was another time of Made in Washington trade shortfall shrinkage – by 3.13 percent. But GDP climbed by only a weak 2.27 percent.

Between January-February 2018 and January-February 2019, the Made in Washington deficit was up by a modest 2.48 percent. Can respectable growth be maintained? Tune in.

In the meantime, legitimate encouragement from the February trade figures can be drawn from the nature of the improvement. Sequential combined goods and services import growth was just 0.23 percent, while exports rose 1.13 percent – nearly five times faster.

On month, the Made in Washington deficit shrunk by 1.96 percent. That improvement combined with its 10.01 percent sequential drop in January made for the biggest such two-month decrease (11.86 percent) since that March-May period of 2015 (13.36 percent).

Good news came on the China trade front as well. February saw the biggest month-to-month reduction in the chronic, immense U.S. goods deficit with the People’s Republic (28.17 percent) since February, 2017 (36.04 percent). In addition, the resulting two-month decline in this trade gap (32.77 percent) was the biggest such figure since January-March, 2013 (36.16 percent) and the second biggest going all the way back to October-December, 2001 (39.87 percent).

An 18.21 percent surge in American merchandise exports helped (especially since it followed a 22.31 percent monthly plunge). But the 20.21 percent monthly falloff in the much greater amount of goods imports was the biggest contributor – and represented the biggest such decrease since February, 2017 as well, not to mention the second biggest since recessionary February, 2009 (23.84 percent).

February’s manufacturing trade performance was excellent as well – relatively speaking, of course, since the deficit remains enormous in absolute terms (topping $1 trillion last year).

But industry’s trade gap plummeted by 20.02 percent on month in February, as exports rose 1.85 percent and imports sank by 9.14 percent. And the gap shows signs of stabilizing on a year-on-year basis as well, as it’s up a mere 0.37 percent during the first two months of this year compared with the first two months of 2018.

(What’s Left of) Our Economy: New Reminders of Why Growth’s Quality Mustn’t be Ignored

Tags

an economy built to last, business investment, capex, CBO, Congressional Budget Office, debt, Financial Crisis, GDP, growth, manufacturing, NABE, National Association of Business Economics, tariffs, Tax Cuts and Job Act, Trade, {What's Left of) Our Economy

For years I’ve been beating the drum about the need for American to pay as much attention to the quality of growth generated by the economy as they pay to the rate of growth itself. And in just the last 24 hours, two great examples have emerged of how ignoring the former can produce worrisomely off-base policy conclusions.

To repeat, the quality of growth matters because even growth that seems satisfactory, or even better, on a quantitative basis can be downright dangerous if its composition is wrong. Go back no further into the nation’s economic history than the last financial crisis to see why. Excessive reliance on intertwined housing, personal consumption, and credit booms nearly led to national and global meltdowns because, in former President Obama’s apt words, America became a “house of cards” overly dependent for growth on borrowing and spending. And he rightly emphasized the need to recreate an economy “built to last” – i.e., one based more on investing and producing.

In numerous posts, I’ve documented how little progress the nation has made in achieving this vital goal. And new reports by the Congressional Budget Office (CBO) and the National Association for Business Economics (NABE) valuably remind of one big reason why: This crucial challenge remains largely off the screen in government, business, and economics circles.

The new CBO study is its annual projection of U.S. federal budget deficits and federal debts, and the agency helpfully describes in detail the economic assumptions behind these forecasts. One key finding concerned the impact on American growth of the Trump administration’s various tariffs on certain products and U.S. trade partners.

Largely echoing the conventional wisdom, CBO predicted that if the levies remained unchanged, the tariffs would “reduce U.S. economic activity primarily by reducing the purchasing power of U.S. consumers’ income as a result of higher prices and by making capital goods more expensive. In the meantime, retaliatory tariffs by U.S. trading partners reduce U.S. exports.”

Specifically, according to CBO, “new trade barriers will reduce the level of U.S. real GDP by roughly 0.1 percent, on average, through 2029” – although its economists acknowledged that the estimate “is subject to considerable uncertainty.”

So that sounds pretty like a pretty counter-productive outcome for the President’s trade policies. But check out what else CBO said about the short-term impact of new U.S. tariffs. “Partly offsetting” the negative effects of those rising prices, along with the damage done by retaliatory foreign tariffs, the levies will also

“encourage businesses to relocate some of their production activities from foreign countries to the United States….In response to those tariffs, U.S. production rises as some businesses choose to relocate their production to the United States. In the meantime, tariffs on intermediate goods encourage some domestic companies to relocate their production abroad where those intermediate goods are less expensive. On net, CBO estimates that U.S. output will rise slightly as a result of relocation.”

In other words, the Trump tariffs will lower overall growth a bit, but more of that growth will be generated by domestic production, rather than by consumers and businesses purchasing more imports – primarily financed of course with more borrowing, and boosting debts. For anyone even slightly concerned with the quality of growth, that could be an acceptable price to pay for a healthier American economy over the long run.

Over the longer run, CBO speculates that the tariffs will reduce private domestic investment and productivity (and in turn overall growth), though it admits that this outlook is even more uncertain than that for the short run. Moreover, it’s easy to imagine public policies that could negate considerable tariff-related damage. For example, if the trade curbs do indeed undermine productivity in part by reducing the competition faced by domestic businesses – and therefore reducing their incentives to continue to improve – more overall competition could be restored through more vigorous anti-trust policies. So the tariffs could still result in growth that’s somewhat slower, but more durable.

The NABE’s January survey of members’ companies painted a pretty dreary picture of another Trump initiative – the latest round of tax cuts. As reported by the organization’s president, “A large majority of respondents—84%—indicate that one year after its passage, the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans.”

As a result, even though the sample size was pretty small (only 106 companies responded to the organization’s questions), these answers significantly undercut tax cut supporters’ claims that the business-heavy reductions would lead to a capital spending boom.

Yet a closer look at the results offers greater reasons for (quality-of-growth-related) optimism. And they represent some evidence that the tariffs are achieving intended benefits as well. In the words of NABE’s president, “The goods-producing sector…has borne the greatest impact, with most respondents in that sector noting accelerated investments at their firms, and some reporting redirected hiring and investments to the U.S.”

This goods-producing sector includes manufacturing, and its outsized reaction to the tax cuts makes sense upon considering how capital-intensive industry has always been. In addition, manufacturing dominates U.S. trade flows, so it makes perfect sense that the tariffs’ jobs and production reshoring impact has been concentrated in this segment of the economy.

And once again, the bottom line seems to be more growth spurred by more domestic production – which can only improve the quality of the nation’s growth, and the sustainability of its prosperity.

Of course, the best results of new American economic policies would be the promotion of more and sounder growth. But as widely noted, big debt hangovers resulting from financial crises make even pre-crisis growth rates difficult to achieve even when quality is ignored – as the specialists quoted in this recent New York Times article appear to admit. So in order to achieve the best long run results, Americans may need to lower their short-term goals and expectations somewhat. That greater realism – and sharper focus – will surely come a great deal faster if important institutions like the CBO and the NABE start paying them at least some attention.

(What’s Left of) Our Economy: Don’t Forget About the Quality of U.S. Growth

Tags

business spending, Financial Crisis, GDP, Great Recession, gross domestic product, growth, housing, inflation-adjusted growth, Obama, personal consumption, real GDP, recovery, Trump, {What's Left of) Our Economy

One of the biggest economic questions facing Americans this holiday season – whether they’re heavily into the roller-coaster stock market or not – is whether the nation will slide into recession. I’m skeptical on that score, but I’m still wondering more about what I’ve long regarded as an even more important question: Will the quality of America’s growth start improving meaningfully?

As I’ve often explained, I prioritize this issue because, as significant as maintaining economic growth is, not all growth is created equal. In particular, unhealthy growth eventually tends to produce terrible results – the prime lesson Americans should have learned since the bubble-ized expansion of the previous decade collapsed into a terrifying financial crisis and the worst recession since the Great Depression.

So this looks like a good time once again to check into whether the U.S. growth recipe has changed since then, and if so, how much. As known by RealityChek regulars, the main indicator is how heavily increases in the inflation-adjusted gross domestic product (the growth measure most widely followed by knowledgeable students of the economy) depend on personal consumption and housing. For these are the parts of the economy whose bubble-decade bloat directly sparked the crisis. And the big takeaway as of last week’s release of the final (for now) figures on third quarter GDP? The situation is turning around, but at supertanker-like (i.e., painfully slow) speed.

Specifically, what I’ve called the toxic combination of personal consumption and housing (parts of the economy dominated by spending and borrowing, rather than saving and investing) came in at 72.66 percent of real GDP in the third quarter. This means that it’s decreased consistently since the first quarter of 2017 – the first quarter of the Trump administration’s stewardship of the economy – when it stood at 73.01 percent. For the record, as of the last quarter of the Obama economy (the fourth quarter of 2016), this figure stood at 72.93 percent

So that’s cause for encouragement. It’s also crucial, however, to recall that at the start of the last recession – at the end of 2007 – personal consumption plus housing as a share of real GDP was 71.49 percent. As a result, over that key time-span, the economy has evolved exactly the way we shouldn’t want. But at least by this measure the economy isn’t nearly as bubbly as at its peak during that bubble decade – when the toxic combination reached 73.74 percent of after-inflation GDP.

Another measure of America’s progress toward recreating an “economy built to last” (a wonderfully on-target phrase used by former President Obama) is the share of real GDP devoted business spending. Here, however, the trends show some troubling recent signs of backsliding.

At the start of the current economic recovery, in the middle of 2009, such spending represented 11.19 percent of price-adjusted GDP. The annual numbers since then, through 2017, are presented below:

2010: 11.42 percent

2011: 12.22 percent

2012: 13.08 percent

2013: 13.37 percent

2014: 13.95 percent

2015: 13.80 percent

2016: 13.65 percent

2017: 14.06 percent

Through 2014, in other words, business spending (or investment, if you prefer) as a share of the economy rose healthily. But this growth shifted into reverse in 2015 and 2016, before rebounding in 2017.

For the third quarter of 2018, business investment as a share of real GDP reached 14.61 percent – which represents further improvement. But the quarterly story isn’t as positive:

1Q 18 14.48 percent

2Q 18 14.64 percent

3Q 18 14.61 percent

That is, business investment as a share of inflation-adjusted GDP dipped between the second and third quarters. Is this dip a blip? Or the start of a longer-term decline? I’m not in the crystal ball business; that’s why I’ll be watching these numbers closely going forward – and why I believe you should, too.

(What’s Left of) Our Economy: Tariff-Spurred Front-Running Still Clear from New U.S. GDP Figures

Tags

exports, GDP, gross domestic product, growth, imports, inflation-adjusted growth, Made in Washington trade deficit, real exports, real GDP, real imports, real trade deficit, recovery, Trade, trade deficit, {What's Left of) Our Economy

This morning came the government’s second read on U.S. economic growth in the third quarter of this year, and the trade results were virtually identical with those of the first report – including on the short-term noise created by President Trump’s tariff-centric policies and foreign retaliation. (The final set of three – for now – third quarter figures will come out toward the end of next month.)

In other words, the new statistics confirmed that, earlier this year, both American exporters and importers had been rushing shipments of goods to each other’s markets in order to beat the tariffs at home and abroad that have been actually imposed or threatened. The biggest new wrinkle is that the resulting boost to the inflation-adjusted U.S. trade deficit, and the resulting trade bite from real growth taken by the trade shortfall’s quarterly increase, was a bit larger than previously estimated.

According to the new release, the price-adjusted U.S. trade deficit hit $945.8 billion on an annual basis the third quarter – 0.72 percent greater than the $939.0 billion reported in the first read on the quarter’s real gross domestic product (GDP). That means that record level reached by the deficit in the third quarter has climbed higher. The previous all-time annualized high for a quarterly constant dollar trade deficit was $932.5 billion, attained in the third quarter of 2006 – shortly before the financial crisis broke out.

Consequently, a conspicuous sign of trade-related front-running – the increase in the real trade deficit between the second and third quarters – grew as well. Pegged last month at 11.65 percent, this sequential rise now stands at 12.46 percent. Nonetheless, it remains only the second biggest such increase on record (behind the 13.18 percent trade deficit widening during the second quarter of 2010, during the current economic recovery’s early stages).

Another sign of front-running (re)appeared in the goods exports numbers. During the second quarter, these exports jumped sequentially by 3.21 percent sequentially on an annual basis – the biggest such increase since the fourth quarter of 2013’s 3.93 percent annualized surge.

In the initial read on third quarter GDP, after-inflation goods exports were judged to have dropped by 1.79 percent – the worst such performance since the 2.44 percent decrease in the first quarter of 2015. Largely as a result, the real third quarter trade deficit ballooned. This morning, this decrease was upgraded – to 2.09 percent. Hence the even larger constant dollar trade deficit number.

The pattern for merchandise imports was similar, though not identical. During the second quarter, they were essentially unchanged sequentially, but as of the third quarter’s initial read, they increased by 2.48 percent – the biggest such increase since the 3.37 percent of the fourth quarter, 2017.

This morning, that increase was revised up slightly, to 2.49 percent.

Because the third quarter price-adjusted trade deficit was revised slightly higher in this latest third quarter GDP report while the growth rate remained at 3.46 percent annualized, the trade bite from growth was revised higher, too. Estimated last month as a 1.78 percentage point subtraction from the overall real economic growth rate, it’s now judged to be 1.91 percentage points. The last time the trade bite was that size in absolute terms was the third quarter of 1985.

In relative terms, the trade bite from growth increased as well – from 51.44 percent of such growth to 55.20 percent. But that remained only its highest level since the fourth quarter of 2016. Then, a growing real trade deficit subtracted 1.32 percentage points from that period’s much slower 1.75 percent annualized inflation-adjusted growth rate (or 75.43 percent of such growth).

With a higher third quarter constant dollar trade deficit came a bigger trade drag on America’s real growth during the current, still far-from-robust economic recovery. As of the initial third quarter GDP report, the real trade deficit’s increase since the recovery began in mid-2009 subtracted $461.7 billion from cumulative economic growth. That was a 13.05 percent hit. This morning’s results, however, pushed up those figures to $468.5 billion – translating into a 13.24 percent hit. As of the final second quarter data, trade had sliced $363.7 billion from cumulative recovery growth, 10.77 percent of the total at that time.

Importantly, though, the growth lost due to the expansion of the price-adjusted Made in Washington trade deficit continues to be much greater. That’s the trade gap calculable from trade flows minus sectors not greatly affected by American trade policy or related decisions – that is, energy and services – and adjusted for inflation.

As of the second quarter, the widening of the Made in Washington deficit resulted in cumulative recovery-era growth being $502.92 percent less than it otherwise would have been had it not grown at all. That’s 14.89 percent less growth.

The latest third quarter figures? Foregone after-inflation growth worth $587.2 billion, or 16.60 percent less growth. Sobering numbers for an economy that’s pulled out most of the available conventional growth-promoting stops (years of super-easy monetary policy being followed by super-easy fiscal policy) with so-far mediocre and likely bubbly results

(What’s Left of) Our Economy: The New U.S. Trade Figures are (Nearly) All About China

Tags

China, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, manufacturing, merchandise trade, recovery, Trade, trade deficit, {What's Left of) Our Economy

Today was one of those days when the U.S. government treated us with both the jobs numbers (for October) and the trade numbers (for September). But just because I posted on the former first doesn’t mean that the latter were humdrum – far from it. And the big story in so many ways was China – along with an important black mark revealed when trade flows are adjusted for inflation.

Specifically, the combined American goods and services trade deficit hit $54.02 billion – just 1.33 percent higher than August’s upwardly revised $53.31 billion, but the second highest monthly total during the current economic recovery. (The highest was February’s $54.96 billion.)

And the prime culprit was the 4.34 percent sequential increase in the immense, chronic U.S. merchandise trade gap with China – to a record $40.24 billion level that represented the third straight monthly all-time high.

This growth means that as of September, this trade shortfall is running 9.91 percent ahead of last year’s annual total – $375.58 billion, which so far has been the record. Also at all-time highs as of September: American goods imports from the People’s Republic. They topped the $50 billion monthly mark for the first time, and were up by 4.32 percent sequentially – possibly because many American companies were rushing their purchases from China ahead of tariffs.

U.S. merchandise exports to China were of course much lower – $9.79 billion in September. The figure was the year’s second lowest (after August’s $9.29 billion) and might have reflected some Chinese front-running of their own government’s retaliatory levies against the United States – although September’s 5.32 percent monthly increase followed a 9.43 percent sequential drop in August.

Contrasting with these China numbers were the September goods trade results with other U.S. trade partners. Specifically, the shortfalls with the European Union, the Eurozone, Germany, Japan, South Korea, Mexico, and Canada all narrowed, and by substantial percentages. Moreover, the China-heavy American manufacturing trade deficit declined as well – by 6.13 percent (albeit from a $92.51 billion August total that was a monthly record).

Moving up to the 30,000-foot level, combined U.S. goods and services exports rose by 1.49 percent, to $212.57 billion, from an August figure of $209.46 billion that was revised upward fractionally. That September total was the third highest ever – after the May and June levels of $214.67 billion and $213.20 billion, respectively.

The much greater amount of overall imports was up 1.46 percent on month in September, with the $266.58 billion figure marking a second straight all-time high. (The previous month’s record of $262.75 billion was revised fractionally higher as well.) So some pre-tariff front-running of purchases from abroad looks like it was at work here, too.  

Some other all-time monthly highs achieved in September: services exports ($70.71 billion – a second straight record as well) and services imports ($47.50 billion).

That black mark? The Made in Washington trade deficit. This is the trade shortfall comprised of flow heavily influenced by U.S. Trade agreements and related policy decisions. As such, it leaves out oil and services – since trade in those sectors is in only a very early stage of liberalization. And adjusting it for inflation enables calculating how much trade has been either contributing to or subtracting from after-inflation growth – the measure of the gross domestic product (GDP) that’s most widely followed.

From the start of the current economic recovery, in mid-2009, through the second quarter of this year, the increase in the price-adjusted Made in Washington trade deficit subtracted 14.89 percent from the period’s cumulative real economic growth of $3.3775 trillion. That’s a trade drag of $502.92 billion.

As of the third quarter, the drag increased to 16.60 percent of cumulative recovery inflation-adjusted growth of $3.5374 trillion. That amounts to $587.23 billion worth of lost growth.

(What’s Left of) Our Economy: So How Loud was That Trade Noise in the U.S. Growth Figures?

Tags

exports, GDP, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, real GDP, real trade deficit, recovery, tariffs, Trade, trade deficit, Trump, {What's Left of) Our Economy

With all the other news of the last few days, it’s been easy to overlook the release last Friday of the first read (of three soundings that will be released in the near term) the nation got on U.S. economic growth in the third quarter. That’s unfortunate because these data on the gross domestic product (GDP) continued to be distorted by sizable fluctuations generated by President Trump’s recent trade policy moves. As a result, the outlook for future growth looks especially cloudy, and that goes double for the odds that its recent acceleration from the crummy rates so far during the current economic recovery can continue. 

The impact of trade-generated short-term noise is clear from the change seen in the U.S. trade deficit between the second and third quarters. In inflation-adjusted terms (the GDP measure that’s most widely followed) during that period, the shortfall dropped by 6.80 percent, from $902.4 billion on an annualized basis to $841.0 billion. That was the biggest sequential decrease since the fourth quarter of 2013 (9.24 percent).

But in the third quarter, the real trade gap rebounded to $939.0 billion – its all-time highest (besting the previous record of $932.5 billion in the third quarter of 2006, during pre-financial crisis days). In addition, the quarterly increase of 11.65 percent was the biggest since the 13.18 percent during the second quarter of 2010 – during the early stages of the current economic recovery.

What’s been going on? As widely reported, both American exporters and importers have been rushing shipments of goods to each other’s markets in order to beat the tariffs at home and abroad that have been actually imposed or threatened. During the second quarter, the biggest rush was made by U.S. exporters – their shipments overseas jumped by 3.21 percent quarter-to-quarter on an annualized basis. That was the biggest surge since the 3.93 percent annualized rise in the fourth quarter of 2013. That’s largely why the trade deficit narrowed.

During the third quarter, at least according to these preliminary figures, goods exports fell back by 1.79 percent – their worst performance since the 2.44 percent decline registered in the first quarter of 2015. Hence, in part, the rebound in the trade deficit. (Again, all these numbers and those in the next paragraph are annualized.)

On the merchandise import front, U.S. purchases of foreign goods in the second quarter stayed pretty flat sequentially – which also contributed to the trade shortfall’s improvement. But in the third quarter, goods imports advanced by 2.48 percent – the biggest such rise since the fourth quarter of 2017 (3.37 percent).

At the same time, as just indicated, these fluctuations have been multi-year highs, not multi-decade highs. So even though the data were noisy, they weren’t epic-ally noisy, or even close.

More epic was the bite from after-inflation growth taken by the higher trade deficit in the third quarter. It chopped fully 1.78 percent points off the 3.46 percent annualized increase. That’s the highest such toll in absolute terms since the 1.91 percentage points taken from growth in the third quarter of 1985! But the picture looks much less dramatic if you measure this growth loss as a share of the actual growth.

During the third quarter, the trade bite amounted to 51.44 percent of that growth. But that’s only the biggest such figure since the fourth quarter of 2016, when the sequential increase in the trade deficit subtracted 75.43 percent (1.32 percentage points) of that period’s 1.75 percent annualized constant dollar growth.

All the same, for the time being, the trade drag on cumulative after-inflation growth over the course of the entire economic recovery is up again. As of the second quarter, it had cost the economy 10.77 percent of its cumulative growth – or $363.7 billion. The third quarter numbers reveal the trade hit at 13.05 percent of cumulative growth – or $461.7 billion.

Moreover, the growth lost during the recovery because of the increase of the Made in Washington trade deficit remains much greater. This gauge measures inflation-adjusted trade flows minus sectors (services and oil) still generally unaffected by trade agreements and related policy decisions.

The latest data are from the second quarter, but they show a Made in Washington trade drag of 18.01 percent on cumulative real recovery growth – which translates into $608.12 billion worth of foregone expansion The next set of monthly U.S. trade data, slated to come out on Friday, will provide the first look on the third quarter statistics.

Some more perspective can be gleaned from the price-adjusted trade deficit’s share of the price-adjusted gross domestic product on a stand-still basis. It’s definitely on the upswing – reaching 5.03 percent as of the third quarter. That’s the highest level since just before the financial crisis-induced ensuing Great Recession struck – during the third quarter of 2007, when the share hit 5.23 percent.

The only consolations identifiable are that overall economic growth today is faster than it was eleven years ago, and that it’s still possible that the real trade deficit’s share of GDP, and the size of the trade drag, will settle down once the trade noise goes away. Not that hope will be the test of Mr. Trump’s trade policy success.