(What’s Left of) Our Economy: A Glass Half Empty or Full Story for the Inflation-Adjusted Trade Deficit?

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exports, GDP, goods trade, gross domestic product, imports, real GDP, real trade deficit, services trade, Trade, trade deficit, {What's Left of) Our Economy

The trade highlights of yesterday’s first official estimate of U.S. economic growth in the fourth quarter of last year and full-year 2022 provide a great lesson on how the pictures drawn by data can vary greatly depending on which time frame you’re looking at – even within the span of a single year.

The quarter-to-quarter numbers look rather good – in terms of deficit reduction – but the annual numbers are pretty discouraging.

We’ll start with those quarterly data, which show that the inflation-adjusted trade deficit shrank for the third consecutive time in the fourth quarter – by 2.87 percent, from $1.2688 trillion at annual rates to $1.2324 trillion. This first such stretch since the year between the second quarter of 2019 through the second quarter of 2020, brought the quarterly shortfall down to its lowest level since the second quarter of 2021 ($1.2039 trillion annualized).

These results also confirmed that the fourth quarter was the second straight to see the economy expand as the deficit contracted. This marked the first time that’s been the case since the period between the second and fourth quarters of 2019, and signals that the economy has been growing healthily, relying more on investment and production than on borrowing and spending.

One sign of regression along these lines: The trade deficit declined in the previous two quarters because exports rose and imports dropped. In the fourth quarter, however, both decreased.

Moreover, the after inflation combined goods and services trade deficit is still 47.98 percent above its level in the fourth quarter of 2019 – just before the United States and its economy began suffering the full effects of the CCP Virus. As of the third quarter, this increase was 52.35 percent.

But overall, the new quarterly statistics still warrant a so-far-so-good interpretation.

Trade’s contribution to the fourth quarter’s growth was much smaller than in the third quarter. Then, it fueled 2.86 percentage points of the 3.20 percent real annual advance – the biggest absolute total in 42 years (but far from a long-term high in relative terms). Without that trade ooost, all else equal, the economy would have grown by a measly 0.34 percent after inflation at annual rates – just a little over a tenth as fast.

In the fourth quarter, trade’s growth contribution was just 0.56 percentage points of 2.86 percent real annualized growth. That’s still positive, though. And if not for this narrowing of the gap, constant dollar GDP would have still expanded, but just by a so-so 2.30 percent.

Drilling down, the new GDP report pegs fourth quarter sequential total exports at $2.5955 trillion in constant dollars at annual rates. This drop was the first since the first quarter of last year, but the slip was just 0.33 percent from the third quarter’s record $2.6041 trillion and the second best total ever.. At the same time, real exports are still only 0.92 percent higher than in the last pre-pandemic quarter. As of 3Q, these sales were 1.26 percent higher.

Total price-adjusted imports retreated, too – and as indicated above for the second consecutive quarter. That’s the longest such streak since the year between the second quarter of 2019 and the peak pandemic-y second quarter of 2020. The actual decrease was steeper than that of exports – 1.16 percent, to $3.8729 trillion at annual rates. Yet these purchases are fully 13.75 percent higher than just before the CCP Virus’ arrival stateside in full force. – roughly where they stood as of te third quarter.

The real deficit in goods sank by 2.84 percent on quarter, from $1.4324 trillion at annual rates to $1.3916 trillion. This sequential decrease was the third straight (the first such span since the peak CCP Virus-dominated period between the fourth quarter of 2019 and the second quarter of 2020). And it pushed this trade gap down to its lowest total since the first quarter of 2021’s $1.3809 trillion. Since just before the pandemic’s fourth quarter 2019 arrival stateside in force, the goods trade deficit is up by 27.54 percent. As of the third quarter, this increase was 34.20 percent.

The longstanding surplus in services jumped by 12.78 percent sequentially, from a price adjusted $163.5 billion annualized to $184.4 billion –the highest such level since the $187.50 billion of the fourth quarter of 2020. Yet reflecting the outsized hit taken by services industries since the virus struck the nation, this surplus is still 21.80 percent lower than in that immediately pre-Covid fourth quarter of 2019. As of this year’s third quarter, that decrease was 30.66 percent.

After-inflation goods exports dipped by 1.77 percent in the fourth quarter, from the $1.9101 trillion annualized total in the third quarter (marking the third straight quarterly record) to $1.8673 trillion. Real goods exports are now 4.51 percent greater than in the fourth quarter of 2019, versus the 6.41percent calculable as of the third quarter.

Constant dollar goods imports in the fourth quarter fell for te third consecutive time, too – a firs stnce the fourth quarter, 2019 through second quarter, 2020 period. The decrease of 1.43 percent, from $3.3334 trillion at annual rates to $3.2856 trillion, produced the lowest such goods import figure since the $3.2582 in the fourth quarter of 2021. In inflation-adjusted terms, goods imports are now 14.21 percent higher than in the immediate pre-pandemic-y fourth quarter of 2019, versus their 16.83 percent increase as of the third quarter.

Services exports in the fourth quarter expanded from $722.5 billion after inflation at annual rates to $740 billion, a 2.42 percent improvement that represented the tenth straight sequential increase in thse sales. But real services exports are still down by 5.44 percent since the fourth quarter of 2019, versus 8.17 percent off as of the third quarter.

Inflation-adjusted services imports were up for a tenth straight quarter, too, in the fourth quarter, but inched up just 0.11 percent, from an annualized $559 billion to $559.6 billion. As a result, their now 15.61 percent larger than just before the pandemic’s arrival in force, versus 14.52 percent as of the third quarter.

Many of the annual figures, however, showed deterioration. Between 2021 and 2022, the combined goods and services trade gap hit its ninth straight yearly record in real terms, as the gap widened by 9.87 percent, from $1.2334 trillion annualized to $1.3551 trillion.

In addition, as a share of real gross domestic product (GDP – the standard measure of the economy’s size), the trade gap set its third straight all-time high, worsening from 6.29 percent to 6.77 percent.

The trade shortfall’s yearly rise subtracted 0.40 percentage points from 2022’s 2.08 percent price -adjusted inflation adjusted growth – a share smaller in both absolute and relative terms than in 2021, when the larger trade deficit sliced 1.25 percentage points from 5.95 percent growth. Both figures are far from records.

Total real exports climbed for the second straight year in 2022, from $2.3668 trillion to 2.5384 trillion, with the 7.25 percent growth rate the strongest since 2010’s 12.88 percent in 2010 – when the economy was recovering from the Great Recession that followed the Global Financial Crisis.

Total real imports posted their second consecutive gain, too, as well as their second straight record. The 8.15 percent increase brought the total to $3.8935 trillion.

Another new all-time annual high in 2022 was set by the constant dollar goods trade deficit, and the record in this case was the fourth in a row. By widening by 11.50 percent, the gap hit $1.5220 trillion.

And continuing the bad news, the real services trade surplus slumped by 5.23 percent in 2022. Moreover, the $162.8 billion figure was the lowest since 2010’s $158.6 billion.

On the export front, constant dollar overeas sales of goods grew by 6.33 percent, from $1.7289 trillion to $1.8383`trillion. The increase was the second straight and the total a new record – topping 2019’s $1.7915 trillion by 2.61 percent.

Yet real goods imports rose even faster. The 6.91 percent advance brought them from $3.1430 trillion to $3.3603 trillion – a second consecutive all-time high.

After-inflation services exports jumped by 9.90 percent from 2021-2022, the biggest such increasesince 2007’s 13.08 percent. And the totals expanded from $656.9 billion to $717.3 billion..

As for price-adjusted services imports, their annual surge of 14.52 percent – from $484.2 billion to $554.0 billion was the fastest ever, surpassing even last year’s robust 12.27 percent.

As always with pandemict or post-pandemic (take your pick) U.S. economic data, the outlook for real trade flows is murky, and dependent on many big unknowables – mainly how much faster and higher the Federal Reserve will hike interest rates in order to fight inflation by slowing the economy, whether it will succeed, how long its inflation-fighting moves will take to impact economic growth and consumer spending fully, how China’s reopening after months of a lockdown-heavy Zero Covid policy will proceed, and whether growth in the rest of the world will perk up or slacken.

My hunch, for the short-term anyway, is that worse inflation-adjusted trade results may keep coming. For example, the quarterly real trade deficit decrease was the smallest of that current three-quarter string. Indeed, it was much smaller than the 11.30 percent plunge between the second and third quarters – which was the greatest since the 17.95 percent nosedive between the first and second quarters of 2009, when the economy was still mired in the Great Recession that followed the Global Financial Crisis.of 2007-08.

In addition, the latest government report projection for the monthly trade deficit (measured in pre-inflation dollars) shows a significant increase in the goods gap, which makes up the lion’s share of both total U.S. trade flows and the deficit. And even if the price-adjusted trade gap continues to fall, such results will be all the less impressive against the backdrop of the economic slowdown and even contraction that’s still being widely predicted.

More specifically, I suspect that American economic growth will either at least weaken as the trade deficit moves up, or that GDP will keep plowing ahead because personal consumption remains resilient, which will keep the trade shortfall on a rebounding course.  

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(What’s Left of) Our Economy: What a U-Turn for the U.S. Trade Deficit!

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CCP Virus, China, coronavirus, expansion, exports, Federal Reserve, GDP, goods trade, gross domestic product, imports, inflation, manufacturing, non-oil goods trade deficit, pandemic, recession, services trade, supply chains, Trade, trade deficit, {What's Left of) Our Economy

As this morning’s stunning official U.S. international trade figures (for November) made clear, the CCP Virus pandemic really wasn’t over yet near the end of last year – at least when it came to China. The steep monthly drop in the November overall trade gap stemmed largely from the Chinese dictatorship’s erratic response to a new tidal wave of virus cases. Beijing at first ordered a series of new shutdowns in numerous major cities, and then abruptly tried reversing course following widespread protests from an outraged and pandemic-and lockdown-exhausted Chinese citizenry.

The resulting turmoil and confusion depressed the Chinese economy – including the export-focused sectors that had led the country to serve as the “world’s factory.”

At the same time, the renewed disruption of China-centric global supply chains only accounted for a little less than half of the November U.S. trade balance’s sequential improvement. And at least as strikingly, the combined goods and services shortfall cratered even though by most accounts the U.S. economy’s growth accelerated late last year. More surprising still, growth appears to have sped up in November – and during the rest of the quarter – even as imports fell off the table.

As known by RealityChek regulars, it’s been rare for the deficit to tumble when the gross domestic product (GDP – the standard measure of the economy’s size) increases, and largely because American expansion typically means that both U.S. consumers and businesses are stepping up their historically robust importing. Much more common are deficit drops mainly due to the economy sagging and this importing tailing off.

As the U.S. recession during the first half of last year came to an end, America’s trade performance racked up a short winning streak during which the trade gap shrank and – even better – exports increased and imports decreased. That’s “even better” because an economy that’s importing less and exporting more is one that’s growing less because of borrowing and spending and more because of producing.  Early in the third quarter, though, the return of growth seemed to start reproducing the standard pattern during which rising imports boosted the deficit.

November’s results sharply reversed that latest trend – to put it mildy. The overall deficit sank month-to-month in November by a whopping 20.93 percent. That’s the biggest fall-off since February, 2009’s (26.85 percent), when the economy was still mired in the Great Recession triggered by the Global Financial Crisis of 2007-08. And the $61.51 billion level (down from October’s $77.85 billion) is the lowest monthly figure since the $59.11 billion in September, 2020, when the economy was recovering from the first CCP Virus wave.

Total exports were off sequentially in November, but only by two percent, from $256.996 billion to $251.864 billion. That was the third straight decline, the biggest since January’s 2.01 percent, and the lowest monthly figure since April’s $244.230 billion. But given the sluggishness of the rest of the global economy, and the unusually level of the U.S. dollar then (which undermines the price competitiveness of U.S.-origin goods and services at home and abroad), this decrease seems pretty modest.

The bigger move by far was in total imports, which plunged by 6.41 percent, from $334.843 billion to $313.374 billion. The decrease was the biggest in percentage terms since the 13.16 percent nosedive of April, 2020, when the pandemic and its economic effects were at their worst in the United States.

The China effect was certainly a huge contributor. The U.S. goods gap with the People’s Republic (country-specific services data take much longer to release) slumped by fully 26.23 percent, from $28.87 billion to $21.30 billion. This $7.57 billion difference represented 46.33 percent of the $16.34 billion monthly improvement in the total trade deficit in November. For good measure, the sequential plunge was the greatest since the 38.93 percent nosedive of February, 2020 (when China was still struggling with the first virus outbreak), and the monthly total the lowest since April, 2020’s $22.30 billion.

And goods imports from China fell sequentially in November by $7.70 billion, from $44.57 billion to $36.88 billion. That decrease of 17.27 percent was steepest since the 31.47 percent collapse in February, 2020, and the monthly total the most modest since March, 2020’s $19.64 billion.

But as a result, more than half of the spectacular monthly drop in the November combined goods and services deficit came from other trade flows, as did 64.13 percent of the month’s total import decline of $21.47 billion.

More evidence that the monthly trade shortfall’s decrease was spurred by much more than China’s troubles: The U.S..global non-oil goods trade gap, the closest proxy to U.S.-China goods trade, was off by $15.21 billion on a monthly basis in November (more than twice the amount of the $7.57 billion decline in the U.S.-China deficit). And non-oil goods imports tumbled by $19.87 billion month-to-month in November – some two and a half times the amount of the $7.70 billion drop in goods imports from China.

In other noteworthy November trade developments, the U.S. goods deficit drooped by 15.44 percent on month, from $99.40 billion to $84.05 billion. That figure is the lowest since December, 2020’s $83.20 billion and the decrease the biggest relatively speaking since the 20.79 percent in Great Recession-y February, 2009.

The long-time surplus in services, the biggest sector of the U.S. economy, and a cluster of industries hit especially hard by the pandemic and its resulting economic damage, rose 4.60 percent, from $21.55 billion to $22.54 billion.  That monthly total was the highest since February, 2021’s $23 billion.

The November slippage in goods exports of 3.03 percent, from $176.16 billion to $170.82 billion, was the largest in percentage terms since the 3.34 percent of September, 2021.

Goods imports dropped 7.51 percent, from $275.56 billion to $254.87 billion. That total was the lowest since October, 2021’s $243.85 billion and the percentage decline the greatest since the 12.79 percent in pandemic-y April, 2020.

Services exports inched up by just 0.26 percent sequentially in November, but the $81.05 billion total was the eighth straight record, and the monthly advance the tenth in a row.

The huge, chronic trade deficit in manufacturing sank from $134.73 billion in October to $115.72 billion, with that November level the best since February’s $106.49 billion – when the last economic downturn had begun. And the sequential retreat of 14.11 percent was the greatest since the 23.09 percent in Great Recession-y February, 2020.

Manufacturing exports were down 4.71 percent on month, from $110.44 billion to $105.24 billion, and manufacturing imports plummeted by 9.88 percent, from October’s $245.17 million (the second worst monthly total ever, behind March’s $256.18 billion), to $220.95 billion.

On a year-to-date basis, however, the manufacturing deficit of $1.3902 trillion has already passed last year’s annual record of $1.3298 trillion, and is running 15.49 percent ahead of the 2021 pace.

Even by CCP Virus-era standards, the November U-turn taken by the trade deficit has rendered the U.S. economic outlook awfully fuzzy. Economists seem pretty confident that the economy is headed for a recession soon, but the latest prominent forecast shows that growth heated up notably between last year’s third and fourth quarters. So if a downturn really is imminent, it’s going to come incredibly abruptly.

That should improve the trade deficit further. But what if the Federal Reserve chickens out and decides to halt or just pause its strategy of cooling inflation by slowing growth significantly because…it becomes clear that the tightening it’s already pursued has begun slowing growth? What if all the money Washington has put into consumers’ pockets continues to fuel robust spending – which tends to pull in more deficit-widening imports? But if so, how come growth has been so much better in the second half of the year even as Americans’ purchases from abroad now look like they’re tanking?

And will China finally get control over the pandemic, and return its economy to some semblance of normalcy?

The answers to those questions seem to be way above any mortal’s pay grade.  And although I’m in the “recession’s coming” camp, so far, the economy doesn’t seem to care.  As a result, I’ll be following the incoming trade and other economic data unusually closely – and with unusual humility.      

(What’s Left of) Our Economy: A Trade High Water Mark Revealed in Today’s U.S. Economic Growth Report?

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

The trade highlights of today’s final (for now!) official estimate of U.S. economic growth in the third quarter of this year further contribute to a story line that only the stereotypical two-handed economist could love.

On the one hand, even though this morning’s trade figures from the Commerce Department weren’t quite as good as those in last month’s second estimate, they continued the encouraging trend of U.S. growth (as measured by changes in the gross domestic product, or GDP – the standard measure of a national economy’s size) picking up while the trade deficit fell.

Such results mean that growth (expressed in inflation-adjusted terms, which are the most widely followed) has been becoming healthier, based more on producing and less on debt-fueled spending. That’s much better than the usual reason for a trade gap narrowing – because the economy slowed significantly and even shrank, and imports therefore went way down.

In fact, even better, while inflation-adjusted imports did fall on quarter in the third quarter, real exports rose. Interestingly, that happy combination of events hasn’t happened since the fourth quarter of 2019, just before the arrival state-side of the CCP Virus pandemic.

On the other hand, the third quarter ended in September. Since then, both the September and October monthly trade reports have been released, and they strongly indicate that this winning streak (which began in the year’s first quarter) has ended.  (See here and here.)

For today, though, since the new numbers close out the third quarter, let’s focus on the good news. The Commerce Department upgraded its growth estimate for those months from 2.90 percent at annual rates in real terms to 3.20 percent. And although the quarter’s inflation-adjusted trade gap increased, the increase was tiny – from $1.2647 trillion at annual rates to $1.2688 trillion.

In addition, the new figures still show a second straight quarterly drop in the trade deficit (from the $1.4305 trillion annual level for the second quarter) – a development not seen since the period from the fourth quarter of 2019 through the second quarter of 2020, which covers the peak of the destructive first wave of the CCP Virus and the sharp economic downturn it triggered.

Further, that $1.2688 trillion amount is still the lowest quarterly constant dollar deficit total since the fourth quarter of 2021 ($1.2796 trillion annualized).

The quarterly deficit decrease of 11.30 percent wasn’t as fast as the 11.59 percent plunge calculable as of last month. But it was still the biggest since the 17.95 percent nosedive between the first and second quarters of 2009, when the economy was still mired in the Great Recession that followed the Global Financial Crisis.

And although the price-adjusted trade shortfall as a share of real GDP rose from the 6.31 percent recorded last month to 6.33 percent, that number is still the lowest since the 6.16 perccent of the second quarter of 2021 and a big improvement from the 7.19 percent in the second quarter of this year.

The sequential reduction in the trade deficit also remained a huge source of the third quarter’s growth, though its role was a little smaller than reported last month. Then, the deficit’s shrinkage accounted for 2.93 percentage points of the 2.90 percent real growth. That amount was the biggest absolute number since the 2.96 percentage point add in the third quarter of 1980.

And without this trade contribution, all else equal, real GDP would have slipped by 0.03 percent annualized and adjusted for inflation – which would have continued the recession that began in the first quarter. (As always the case with the GDP figures, one element like trade can produce more than all the total change because increases or decreases in other elements can offset it.)

As of today, a smaller trade deficit fueled a still impressive 2.86 percentage points of the 3.20 percent real annual growth estimate that remained the biggest absolute total in 42 years. So absent that trade contribution, the economy all else equal would have grown by a measly 0.34 percent after inflation at annual rates – just a little over a tenth as fast.

But in relative terms, trade’s role in the economy’s quarterly expansion or contraction remained far off the record. In fact, its relative importance was much greater in the second quarter, when its drop added 1.16 percentage points of growth while GDP dipped by 0.58 percent in real annual terms.

Even so, the recent trade deficit improvement needs to be put in perspective: The gap remains 52.35 percent wider than in the fourth quarter of 2019, the last full quarter of data before the CCP Virus’ arrival. That’s slightly worse than the 51.86 percent deterioration calculable last month.

According to the new GDP report, inflation-adjusted total exports rose by 3.46 percent sequentially in the third quarter, from $2.5169 trillion at annual rates to $2.6041 trillion. That’s a bit worse than the 3.63 percent advance calculable last month. But the new total is still a new record (surpassing the $2.5823 trillion of the first quarter of 2019). And such overseas sales are still 1.26 percent higher than their immediate pre-pandemic level, versus the 1.42 percent calculable last month.

Total price-adjusted imports were virtually unrevised from last month’s estimate, coming in this morning at $3.8729 trillion at annual rates. As a result, however, they still sagged quarter-to-quarter (by 1.90 percent from the second quarter’s record $3.9475 trillion) only for the first time since the second quarter of 2020 (the peak pandemic quarter). These U.S. overseas purchases are now up 13.75 percent since just before the pandemic’s arrival in force in early 2020.

Goods trade comprises the vast majority of total U.S. trade, so it’s important to note that it grew over the third quarter’ssecond estimate – from $1.4286 trillion at annual rates to $1.4324 trillion. But it’s still down for the second consecutive quarter. This “final” total is still the lowest since the $1.4144 trillion recorded in the third quarter of last year. And the sequential tumble of 9.60 percent (from $1.5846 trillion) is still the biggest since the 12.63 percent plunge during the Great Recession-y second quarter of 2009.

But whereas the goods deficit was up since the fourth quarter of 2019 by 33.94 percent as of last month, now the increase is 34.30 percent.

The flow of slightly worse trade news continued with the results from the service sector. Its longstanding surplus was revised down for the third quarter from $164.3 billion at annual rates to $163.5 billion. But the improvement over the second quarter’s $149.4 billion annualized was still a healthy 9.44 percent and this quarterly rise was still the strongest since the 12.90 percent in the fourth quarter of last year.

Yet the unusually hard pandemic hit taken by service industries is still clear from this surplus’ change from the fourth quarter of 2019. It’s 30.66 percent lower.

Taking inflation into account, goods exports remained at their third consecutive quarterly record according to the new GDP report, and the revised total was a fractionally upgraded $1.9010 trillion at annual rates. The improvement over the second quarter: 4.17 percent. And since just before the CCP Virus began roiling the U.S. economy, these exports have grown by 6.41 percent in constant dollars.

Goods imports came in 0.12 percent higher in today’s GDP report than last months – $3.3334 trillion annualized as opposed to $3.295 trillion. But they were nonetheless 2.23 percent lower than in the second quarter, and still fell in back-to-back quarters for the first time since that fourth quarter, 2019-second quarter, 2020 span covering the early pandemic period.

Moreover, these purchases are now 16.83 percent higher after inflation than in the fourth quarter of 2019, just before the CCP Virus’ arrival in force.

Real services exports climbed sequentially during the third quarter, too, but by just 1.83 percent over the second quarter’s $709.5 billion annualized, rather than the 2.40 percent judged last month. The new $722.5 billion figure is a full 8.17 percent below that of the fourth quarter of 2019.

Finally, the new GDP report showed that inflation-adjusted services imports actually fell by 0.20 percent sequentially in the third quarter, rather than increasing by 0.37 percent as reported last month. These results broke a five-month string of quarterly increases, and the new $559 billion total is now just 1.45 percent higher than its immediate pre-pandemic level, as opposed to the 2.03 percent advance calculable last month.

But as observed above, this final third quarter GDP release might mark a high water mark for U.S. trade flows for the time being.  The deficits could well keep falling in after-inflation terms (those aforementioned more downbeat recent monthly reports present the pre-inflation figures). The likeliest reason, though, would seem the advent of a U.S. recession that depresses imports. And however necessary this kind of slump may be needed to fight inflation and improve the chronic, still massive U.S. production-consumption imbalance over the longer term, that’s medicine that few Americans will be welcoming.  

(What’s Left of) Our Economy: The Good U.S. Trade and Growth News Continues – For Now

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

In my post on the first official read on America’s economic growth in the third quarter of this year, I wrote that “You couldn’t ask for a better” set of results on the trade front “unless you’re into making unreasonable requests.”

As it turns out, I may need to change my definition of “reasonable” somewhat. For however encouraging that initial estimate’s news that the economy grew at a solid rate after accounting for inflation while the trade deficit shrunk, today’s second release showed that real growth was a bit stronger than first judged, and the trade deficit decline a bit greater.

That’s cause for celebration because an expanding economy and a falling trade deficit means that growth is getting healthier – and more sustainable. Specifically, the gross domestic product (GDP, the standard measure of the economy’s size) is increasing less because Americans’ borrowing and spending are up than because they’re boosting production. And in that vein, the trade gap shrank for the ideal combination of reasons: Exports rose and imports decreased.

In that prior report on third quarter GDP, the U.S. government pegged growth at 2.54 percent in real terms at annual rates, and the trade deficit’s contraction from second quarter levels at 10.94 percent ($1.4305 trillion at annual rates to $1.2740 trillion).

This morning, those numbers were revised up to 2.90 percent annualized real growth and a trade deficit that came in at $1.2647 trillion. That’s not a lot lower, of course, but so far (there’s another GDP revision coming in a month), it’s the smallest quarterly trade shortfall since the $1.2309 trillion of last year’s second quarter.

Moreover, the new figures confirm that the constant dollar trade deficit has now retreated for two straight quarters since the stretch between the fourth quarter of 2019 and the second quarter of 2020. That period of course immediately preceded the arrival in force of the CCP Virus and its deeply depressing impact on the economy.

The 11.59 sequential narrowing of the trade gap also was still the biggest such improvement since the second quarter of 2009, when the economy was still stuck in the Great Recession that followed the global financial crisis (17.95 percent).

It brought the price-adjusted trade deficit as a share of real GDP down to 6.31 percent – its lowest level since that second quarter of 2021 (6.16 percent). And as of this latest government data, 12.24 percent plunge in this ratio from the second quarter’s 7.19 percent was the biggest sequentially since the 17.89 percent registered in that Great Recession-y second quarter of 2009.

All the same, the overall real trade deficit has ballooned by 51.86 percent since the last full pre-CCP Virus for the U.S. economy (the fourth quarter of 2019).

Trade’s contribution to third quarter growth rose in absolute terms from 2.77 percentage points to 2.93 percentage points – the best such performance since the 2.96 percentage points generated in the third quarter of 1980. (I mistakenly reported last month that the initial figure was the biggest since the second quarter’s 3.99 percentage points. But it was, as I correctly noted, the largest absolute figure for a quarter in which the economy expanded since that third quarter of 1980.)

In relative terms, though, trade’s contibution to third quarter growth was far from a record. Indeed, during the second quarter of this year, the decline of the trade deficit added 1.16 percentage points of growth while the economy contracted by 0.58 percent in real annual terms. (As with any individual element of GDP, the trade contribution can be greater than the overall growth rate when other elements decrease.)

Put differently, without this trade boost to growth, the economy in the third quarter would have been 0.03 percent smaller than in the second quarter in real, annualized terms – not 2.90 percent bigger.

Today’s GDP data showed that inflation-adjusted total exports rose by 3.63 percent sequentially (from $2.5169 trillion to $2.6083 trillion), The latter total is a new record (surpassing the old mark of $2.5823 trillion in the first quarter of 2019). And U.S. overseas sales of goods and services are now 1.42 percent above their immediate pre-pandemic level.

Total imports dipped sequentially not only for the first time since the second quarter of 2020 (the peak pandemic quarte) but by more than first judged – 1.89 percent versus 1.78 percent – and from a record $3.9475 trillion to $3.8730 trillion. They’re now 13.73 percent greater than in the immediately pre-pandemic-y fourth quarter of 2019.

In goods trade, which dominates U.S. trade flows, today’s figures show that the deficit sank on quarter by 9.84 percent versus the 9.51 percent estimated initially. This second straight shrinkage was the biggest in percentage terms since the 12.63 percent fall-off in that Great Recession-y second quarter of 2009 and depressed the shortfall to $1.4286 trillion – the lowest level since the third quarter of last year ($1.4144 trillion).

But the goods trade deficit has still worsened since just before the pandemic by 33.94 percent.

The U.S. after-inflation services trade figures also improved from the initial GDP report’s results, with the longstanding surplus – by 9.97 percent, from $149.4 billion at annual rates in the second quarter to $164.3 billion. The previous release put the increase at 7.43 percent, and the latest widening is the biggest since the 12.90 percent in the fourth quarter of last year.

Yet reflecting the hit globally taken by services industries, the services surplus is down 30.32 percent since just before the pandemic became roiling the national and world economies.

Inflation-adjusted goods exports in the third quarter hit $1.9009 trillion at annual rates – their third consecutive all-time high and an increase of 4.16 percent versus the 4.04 percent figure in the first estimate. These overseas sales have now risen by 6.40 percent since the fourth quarter of 2019.

By contrast, their imports counterparts declined by more than first judged – by 2.35 percent versus 2.26 percent, to $3.3295 trillion annualized. This second straight quarterly decrease was the first back-to-back drop since the fourth quarter, 2019-second quarter 2020 stretch that encompassed the CCP Virus’ devastating first wave.

After-inflation services exports in the third quarter were revised up as well, increasing by 2.40 percent versus the initial estimate of 2.03 percent, and now stand at $726.5 billion annualized. Yet just before the pandemic’s arrival, they were $786.8 billion – 8.30 percent higher.

Real services imports followed this trade balance improvement pattern, climbing by just 0.37 percent on quarter in the third quarter versus the 0.59 percent reported in the first estimate. And this sixth straight quarterly increase, to $562.2 billion at annual rates, means that these purchases are now up just 2.03 percent since the fourth quarter of 2019.

All good things must come to an end, however, and I’m concerned that this may be the case for the recent span of higher growth and smaller trade deficits. Principally, the third quarter ended in September, and the monthly U.S. trade reports (which also so far only go through September, and which aren’t adjusted for inflation) reveal precisely this dimmer picture.

In addition, the government’s advance figures on October goods trade (which also came out today) report both a big jump in the deficit, and one powered by falling exports and rising imports – exactly the opposite of the ideal pattern. But at least we’re due for one more estimate (for now) on third quarter GDP and inflation-adjusted trade flows. So make sure to enjoy that (likely) good trade news while you can! 

(What’s Left of) Our Economy: Trade Leads to Resumed and Healthier U.S. Growth

Tags

consumers, expansion, exports, Federal Reserve, GDP, goods trade, gross domestic product, imports, real GDP, real trade deficit, recession, services trade, stimulus, trade deficit, {What's Left of) Our Economy

You couldn’t ask for a better official first read on American trade flows and U.S. economic growth for the third quarter of this year than the one that came out on Thursday – unless you’re into making unreasonable requests.

On top of that report on the gross domestic product (GDP – the leading measure of the economy’s size) showing a return to expansion that ended the recession that marked the first half of the year; and on top of the trade deficit shrinking for the second straight quarter (a first since the third and fourth quarters of 2019), the trade gap shrank in the best possible way, for the best possible reason.

Here’s why. The new GDP figures (which will be revised twice more in the next two months, as is the case for every such release) estimated that the nation’s output of goods and services rose in inflation-adjusted terms (the measure most closely followed) by a solid 2.54 percent at annual rates.

And as real GDP climbed, the after-inflation trade deficit decreased from $1.4305 trillion annualized to $1.2740 trillion. That’s important because there’s nothing unusual about the trade shortfall declining when the economy contracts. In fact, that’s often the case. After all, a slumping economy pulls in fewer imports. But a smaller trade deficit during a quarter of growth? That’s unusual, and genuinely exciting, since it means that the growth has been healthy and, all else equal, sustainable – driven by production and not consumption.

Better yet, improvement was registered on both sides of the trade ledger, with exports up and imports down. The export progress was especially impressive, given that selling U.S.-origin goods and services abroad should be getting harder because of an economic slowdown in most of the rest of the world, and the surging U.S. dollar – which reduces their price competitiveness abroad (and at home, for that matter, too).

The third quarter constant dollar trade deficit hit its lowest level since the third quarter of last year ($1.2675 trillion annualized), and the consecutive declines were the first since the stretch between the fourth quarter of 2019 and the second quarter of 2020 – that’s of course when the CCP Virus began ripping through the nation and triggering a short but deep economic slump.

In addition, this latest sequential narrowing of the price-adjusted trade gap was the biggest in relative terms (10.94 percent) since the second quarter of 2009, when the economy was still mired in the Great Recession produced by Global Financial Crisis.

As a result, the real trade deficit as a share of constant dollar GDP sank to 6.36 percent – its lowest level since the second quarter of 2021 (6.16 percent). And the drop in this ratio from the 7.19 percent it reached in the previous quarter (11.54 percent) was the biggest also since the second quarter of 2009 (17.89 percent).

Trade’s contribution to third quarter growth was noteworthy as well. By generating 2.77 percentage points to the total quarterly after-inflation GDP increase of 2.54 percent annualized, it bolstered the economy by the greatest amount in absolute terms since the second quarter of 1980 – when it increased constant dollar GDP by 3.99 percentage points during a stretch when the economy shrunk overall by 5.48 percent at an annual rate. (As with any element of GDP, the trade contribution can be greater than the overall growth rate when other elements decrease.) 

Another way to look at this development:  All else equal, without this trade boost to growth, the economy would have shriveled by 0.23 percent at annual rates in the third quarter, and by the most influential measure, the recession would still be on.  

But again, it’s pretty standard for the trade to support growth during a contraction. Therefore, it’s also worth observing that its latest role during an expansion quarter was the biggest since the third quarter of 1980, when it added 2.96 percentage points to that period’s 2.66 percent annualized rebound.

Nonetheless, this trade contribution to growth was far from the biggest on record in relative terms. (This statistical series reports quarterly data going back to 1947.) For example, during the second quarter of this year, the decline of the trade deficit added 1.16 percentage points of growth while the economy contracted by 0.58 percent in real annual terms.

Moreover, it’s crucial to keep in mind that the third quarter’s trade deficit was still the fourth largest ever. (These quarterly data go back to 1947, too.) And it’s fully 52.98 percent higher than its level in the fourth quarter of 2019 – the last full quarter of data before the CCP Virus began roiling and warping the economy.

That third quarter export increase that helped the overall trade deficit shrink hit 3.43 percent – rising from $2.5619 trillion at annual rates in the second quarter to $2.6032 trillion. The result was a new all-time high. (The old record was the $2.5823 trillion annualized level in the first quarter of 2019.) This second straight quarterly improvemet in overseas sales of goods and services also finally pushed them above their immediate pre-pandemic level – by 1.22 percent.

On the import side, after setting five straight quarterly records, U.S. inflation-adjusted purchases of foreign goods and services sank by 1.78 percent sequentially in the third quarter, from $3.9475 trillion at annual rates to $3.8772 trillion. In fact, this quarterly retreat was the first since the second quarter of 2020, when the pandemic was spreading and depressing economic activity rapidly.

Yet this after-inflation import total was still the third highest on record, and the level of these total purchases remains 13.88 percent higher than in the immediate pre-pandemic fourth quarter of 2019.

Goods trade dominates U.S. trade flows and helped the total constant dollar deficit decrease by falling 9.51 percent sequentially in the third quarter, from $1.5846 trillion at annual rates to $1.4339 trillion. This second straight narrowing brought the goods deficit to its lowest level since the third quarter of last year $1.4144 trillion.

The improvement, moreover, was the biggest in percentage terms since the 12.63 percent plunge in the second quarter of 2009, when the economy was still mired in the Great Recession that followed the Global Financial Crisis.

Yet the goods trade deficit remains 48.57 percent above its level in that immediate pre-pandemic fourth quarter of 2019.

Meanwhile, the longstanding services trade surplus advanced by 7.43 percent in constant dollar terms, from $149.4 billion at annual rates to $160.5 billion. The increase in this sector followed two straight sequential drops in this surplus, and reflecting the outsized CCP Virus hit taken by this sector, is still down 31.93 percent since just before the pandemic’s arrival.

Real goods exports set their third consecutive record in the third quarter, growing 4.04 percent, from $1.8249 trillion at annual rates to $1.8986 trillion. These foreign sales are now 6.27 percent higher than in the fourth quarter of 2019.

After-inflation goods imports dipped for the second straight time, and by 2.26 percent – from $3.4095 trillion annualized to $3.3325 trillion. These purchases are still up 16.80 percent since just before the pandemic’s arrival.

Services exports in the third quarter advanced for the ninth straight time – climbing 2.03 percent, from $709.5 billion at annual rates to $723.9 billion. Yet they remain 7.99 percent below those pre-CCP Virus fourth quarter, 2019 level.

Services imports edged up by 0.59 percent in the third quarter. This sixth straight increase, from a $560.1 billion annualized level to $563.4 billion, brought them to 2.25 percent above their fourth quarter, 2019 level.

The big concern hanging over the good GDP news is the economy’s continued dependence on the massive stimulus provided to households and businesses during the pandemic era by Presidents and Congresses, and by the Federal Reserve – even though consumers are steadily spending down their windfalls. (See this post for the key consumer finance data.) That means that more towering inflation will be with Americans for many more months unless government policies change dramatically.

But however good the trade deficit and growth quality news, wild cards and potential headwinds and crosswinds still abound. Among them: the growth slowdown that’s coming as tighter Fed monetary policy works its way through the economy, to continuing economic woes in the major markets for U.S. exports, to the ongoing dollar surge, to the distinct possibility that the Fed will chicken out on the inflation-fighting front, and that the rest of the government will want to juice consumer spending power again if recession fears return. The last two developments, of course, could well draw in disproportionate amounts of imports, and as the next national election approaches, the odds that they play out seem certain to grow.  

(What’s Left of) Our Economy: An Encouraging June Swoon for the U.S. Trade Deficit

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China, energy, exports, GDP, goods trade, gross domestic product, imports, Made in Washington trade deficit, manufacturing, non-oil goods deficit, recession, services trade, supply chain, Trade, trade deficit, Ukraine War, Zero Covid, {What's Left of) Our Economy

This morning’s official data (for June) show that U.S. trade was firing on practically all cylinders that month. In addition, the shrinkage in the combined goods and services deficit to the lowest level ($79.61 billion) since last December ($78.87 billion) was clearly attributable not only or even mainly to developments holding the nation’s imports down – ranging from a slowing in American economic growth (and therefore in most consumption) to the wounds China is inflicting on its export-heavy economy due to its insanely over-the-top Zero Covid policy to separate renewed backups at U.S. ports.

Instead, it’s also happening because many exports are up (to record levels), and that’s especally impressive because the dollar is so strong (which places U.S.-origin goods and services at price disadvantages all over the world, including in their home market) and because global growth is getting so weak (which tends to dampen demand for America’s offerings). And P.S. – these rising exports encompassed more than just the U.S. natural gas and other fossil fuels in such demand due to the Ukraine war and related sanctions on Russia.

The June figures reported one important exception, though: a monthly surge in the goods trade deficit with China to its highest level since November, 2018.

The June sequential drop in the overall trade deficit of 6.23 percent, from May’s $84.91 billion, was the third straight monthly decrease – a streak that hasn’t been seen since the second half of 2019, when the shortfall dropped sequentially six consecutive times – between June and November. Even better, the May total trade gap was revised down by a healthy 0.75 percent.

The deficit in goods trade – which dominates U.S. trade flows – tumbled 4.74 percent on month from $104.43 billion to $99.48 billion, its lowest level since last November. It, too, decreased sequentially for the third straight month, the first such stretch since December, 2019 through February, 2020 – just before the CCP Virus’ arrival in force began roiling and distorting the entire U.S. economy.

Meanwhile, the longstanding surplus in trade in services – which has been hit particularly hard by pandemic-related lockdowns and more cautious consumer behavior – advanced by 1.76 percent, from May’s upwardly revised (by 0.58 percent) $19.53 billion to $19.87 billion.

Combined goods and services exports hit their fifth straight monthly high in June, rising 1.67 percent from May’s upwardly revised $256.52 billion to $260.80 billion.

Energy goods exports were indeed way up – with natural gas overseas sales jumping by 26.51 percent, fuel oil exports increasing by 8.66 percent, and miscellaneous petroleum products climbing by 3.97 percent.

But they were far from the only significant export winners. For example, machinery and equipment exports soared by 13.78 percent on month in June; of foods, feeds, and beverages exports improved by 5.81 percent; and high tech goods’ foreign sales gained 4.51 percent.

In fact, goods exports overall also reached unprecedented heights for a fifth straight month in June, rising 1.97 percent sequentially from $179.51 billion to $183.04 billion.

As for services, their foreign sales hit their third straight all-time high, growing 0.97 percent on month, from $77.01 billion to $77.76 billion.

Overall imports, as mentioned, inched down sequentially – by 0.30 percent – in June, from $341.43 billion to $340.41 billion.

Another small monthly June decrease was registered by goods imports, which sagged by 0.50 percent, from $283.94 billion to $282.52 billion.

Only services imports broke this pattern: They set their own fifth consecutive record, increasing by 0.70 percent, from $57.49 billion to $57.89 billion.

The news in manufacturing trade was good, too – but only in comparison to industry’s recent alarming performance. The sector’s chronic, mammoth trade deficit was down 1.92 percent on month in June, from $132.60 billion to $130.05 billion. But this most recent total was still the third highest ever, after March’s $142.22 billion and the May figure.

Manufacturing joined the list of June export winners, as foreign sales increased sequentially from $112.15 billion to a new record $114.78 billion.

Manufactures imports inched up by mere 0.04 percent on month in June, from $244.75 billion to $244.83 billion. But this number was the second worst on record, after March’s $256.18 billion.

All told, at the statistical midway point of the year, the manufacturing trade deficit is running 22.13 percent ($756.53 billion vs $619.42 billion) ahead of last year’s record total. As a result, it’s all but certain that the United States in 2022 will rack up its fifth straight $1 trillion-plus manufacturing trade gap.

Year-to-date manufacturing exports are up 16.26 percent – from $548 billion to $637.12 billion. But the much greater amount of manufacturing imports has risen even faster – by 19.38 percent, from $1.16742 trillion to $1.39365 trillion.

Until very recently in the pandemic period (and its possible aftermath), as noted here, domestic manufacturing output and employment have held up remarkably well despite U.S.-based industry’s ballooning trade gap. The reason, as I pointed out here, is that Americans’ demand for manufactured goods has grown so strongly that domestic producers have been able to boost output even as imports flooded in much faster.

But with domestic manufacturing output decreasing in inflation-adjusted terms in both May and June, it looks like an economy-wide U.S. slowdown is weakening this demand, and that U.S.-based industry is finally paying a price for the share of its home market that it’s been losing.

The June China trade front news was even worse than that for manufacturing. The U.S. goods deficit with the People’s Republic soared by 17.13 percent sequentially, from $31.54 billion to $36.95 billion. That level is the highest since November, 2018’s $37.69 billion, and the increase the biggest since the 20.45 percent recorded in May, 2020 – when China and the United States were making recoveries from the first CCP Virus wave.

U.S. goods exports to China slumped by 5.22 percent, from $12.32 billion to $11.68 billion, while imports popped by 10.85 percent, from $43.86 billion to $48.63 billion – the highest total since last December’s $49.53 billion.

At least as important, this bilateral goods trade deficit is now up 27.51 percent on a year-to-date basis, as opposed to the 24.34 percent increase over the same period for its closest global proxy – the U.S. non-oil goods deficit.

For most of the time since the imposition of the first China tariffs imposed by former President Donald Trump in early 2018, this “Made in Washington” trade deficit (so named because by omitting services and oil trade, it tracks the U.S. trade flows most heavily influenced by U.S. trade policy) has been rising more slowly than the China goods deficit. Yet the gap, as noted in last month’s trade report, has been narrowing lately, and the June figures signal that it might be gone for the time being.

In general, though, the June trade report was a pleasant surprise given the currency and global growth headwinds mentioned above. Additional cause for some optimism:  The latest official release on the size of the U.S. economy in inflation-adjusted terms told much the same story of the trade gap narrowing for the “right reasons.”

But can the trade deficit keep falling due mainly to better exports, rather than following the typical slowdown and recession pattern of shrinking mainly due to the falling exports caused by weaker demand? In other words, can the falling deficit contribute to the quality of U.S. growth rather than simply reflect a feebler economy? Those are different questions altogether.

(What’s Left of) Our Economy: Is the U.S. Trade Deficit’s Latest Dip More than Recession-y?

Tags

CCP Virus, China, coronavirus, COVID 19, economic growth, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, real GDP, real trade deficit, recession, services trade, supply chains, Trade, trade deficit, Ukraine War, Zero Covid, {What's Left of) Our Economy

Although yesterday’s official figures show that the U.S. economy has now shrunk for the second straight quarter, the nation’s chronic and immense trade deficit played a diametrically different role in producing the final results. Whereas during the first quarter of this year, the trade gap’s widening was the difference between expansion and contraction of the gross domestic product (GDP – the standard measure of the economy’s size), during the second quarter (at least according to the new advance figures), its narrowing kept the drop in GDP from being considerably worse.   

The tumble of 0.94 percent at annual rates revealed in GDP after inflation (the most widely followed measure, and the GDP gauge that will be used throughout this post unless otherwise specified) came on top of a 1.58 percent decrease in the first quarter. As many have observed, two consecutive quarters of real GDP decline has long been a common definition of a recession.

This time around, however, a 4.53 percent fall-off in the inflation-adjusted trade shortfall, from a record $1.5447 trillion at annual rates to $1.4747 trillion, generated 1.43 percentage points of sequential growth in the second quarter. Although the new deficit was still the second biggest on record, the improvement prevented the quarter’s GDP drop from reaching 2.37 percent – which would have been the worst such performance since the nearly 36 percent crash dive recorded between the first and second quarters of 2020, when the CCP Virus pandemic and its impact on the economy were at their worst.

This year’s second quarter, moreover, marked the first time that America’s trade flows had added to growth, and the biggest such contribution in absolute terms, since that spring of 2020, when the pandemic and related mandated and voluntary curbs on economic activity greatly depressed U.S. imports. In relative terms, the second quarter’s trade contribution to growth was the best since the second quarter of 2009, near the end of the Great Recession that followed the global financial crisis. During that quarter, real GDP sank at an annual rate of 0.68 percent, but trade generated 1.53 percentage points of growth.

By contrast, during the first quarter, the trade deficit’s expansion subtracted a whopping 3.23 percentage points from the change in GDP – which turned what would have been a 1.65 percent sequential increase into that 1.58 percent shrinkage.

The reduction in the trade deficit also enabled the shortfall to decrease as a percentage of the entire economy from the first quarter’s all-time high of 7.83 percent to 7.49 percent. Further, the 4.34 percent sequential decrease represented by this progress was the biggest since the 9.45 percent decline in the fourth quarter of 2019 – just before the pandemic arrived state-side in force.

At the same time, at 7.49 percent of real GDP, the second quarter trade deficit was still the second highest ever, and since that immediately pre-pandemic-y fourth quarter of 2019, the trade shortfall has ballooned by 73.99 percent. As of the first quarter, it had swollen during this period by 82.24 percent.

Ordinarily, the reasons for this trade deficit decline would be a clearcut positive:  Even though the gap usually narrows as the economy weakens, it stemmed from  total exports (counting goods and services) advancing much faster than the much larger amount of imports. But as the nation and world are still in the CCP Virus and in the middle of the Ukraine War, with all the supply chain turbulence they’ve both brought on and will surely keep bringing, drawing strong conclusions still seems unusually hazardous.   

Those total U.S. exports improved by 4.22 percent on quarter, from $2.3613 trillion at annual rates to $2.4410 trillion – the highest such total since the $2.5533 trillion recorded in the fourth quarter of 2019, just before the pandemic hit the U.S. economy. The results were especially encouraging since total exports fell sequentially in the first quarter (by 1.23 percent), and given the global economic slowdown and the dollar’s strengthening to roughly 20-year highs versus nearly all currencies. This move in and of itself put U.S.-origin goods and services at a price disadvantage versus foreign competitors the world over.

Combined goods and services exports are now down just 3.61 percent since that fourth quarter of 2019, versus the 7.52 percent calculable last quarter.

Total imports inched up just 0.76 percent, although the new $3.9357 trillion annualized level did amount to a sixth straight record and an eighth consecutive quarterly increase. These purchases have now climbed by 15.37 percent during the pandemic era, versus the 14.85 percent calculable last quarter.

The goods trade deficit, meanwhile, declined by 3.96 percent sequentially, from the first quarter record total $1.6572 trillion annualized to $1.5916 trillion. This drop was the first since the peak pandemic-y second quarter of 2020, and the biggest since the 6.52 percent shrinkage in the fourth quarter of 2019. The goods trade gap, consequently, has grown by 48.55 percent since the end of 2019, as opposed to the 54.68 percent calculable last quarter.

Goods exports in the second quarter rose 3.69 percent from the first quarter’s $1.7577 trillion at annual rates to a new record $1.8225 trillion – surpassing the previous all-time high of $1.8046 trillion set in the first quarter of 2019. These new results also mean that goods exports have finally exceeded pre-pandemic levels (by 2.24 percent). After the first quarter ended, they were still down 1.39 percent since the fourth quarter of 2019.

Goods imports, however, recorded their first quarterly decrease since the third quarter of 2021 – though only from a worst ever $3.4149 trillion annualized to $3.4141 trillion. But these imports are still 19.63 percent higher than in that immediate pre-pandemic fourth quarter of 2019.

The services trade surplus improved by 8.60 percent between the first and second quarters, from $109.3 billion at annual rates to $118.7 billion. Reflecting the unusually hard hit delivered by the pandemic to the service sector, however, this surplus is still 47.64 percent lower than its level just before the virus began seriously affecting the U.S. economy. That is, it’s been nearly cut in half.

Services exports in the second quarter actually increased sequentially for the third straight time. And the 5.56 percent advance, from $631.5 billion annualized to $666.6 billion was the strongest since the 5.83 percent jump in the fourth quarter of 2006. Nonetheless, services exports remain 13.84 percent off their immediate pre-pandemic level, versus the 18.38 percent calculable last quarter.

Services imports are now back above their pre-pandemic levels, too (by 1.65 percent), having risen 4.92 percent sequentially in the second quarter, from $522.2 billion at annual rates to $547.9. The improvement, moreover, was the fastest since the 7.80 percent recorded in last year’s third quarter.

As mentioned above, usually it’s unambiguously good news for both trade, and to a lesser extent, the entire economy, when the trade deficit diminishes because exports are up considerably faster than imports. It’s normally even better news when these kinds of results are delivered in challenging international and exchange rate environments. But with the Ukraine War and China’s Zero Covid policy still distorting U.S. and global trade flows and unlikely to end anytime soon, unbridled optimism is hard to justify. So like the Federal Reserve, RealityChek will remain data dependent as it tries to detemine the outlook for U.S. trade’s fortunes.

(What’s Left of) Our Economy: Hold Your Applause on Inflation Progress Signs

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consumers, demand, Employment, Federal Reserve, fiscal policy, gas prices, GDP, gross domestic product, household spending, housing, inflation, Jobs, manufacturing, manufacturing jobs, manufacturing production, monetary policy, mortgages, personal consumption, personal spending, recession, retail sales, trade deficit, {What's Left of) Our Economy

At the end of last month, I wrote that if a national government (including its central bank) wants to get inflation down, it’s not a rocket science-type challenge.” Basically all that’s needed is the willingness to take some combination of the kinds of fiscal and monetary measures that are guaranteed to slow economic growth.

Keep that in mind as you read the mushrooming number of claims that America’s recent historic burst of inflation is either peaking (see, e.g., here, here, and here) or should peak soon (e.g., here, here, and here). Because wherever softening prices can be seen, levels of demand have fallen off either because goods and services are becoming unaffordable and sales are down, or because easy money has gotten harder, or some degree of both. So let’s not conclude that inflation progress stems from a sudden outburst of policy-making genius.

Anyone doubting the start of a economic downshifting should check out the many of the latest reports released by the federal government on the economy’s performance. In the first quarter of this year, the gross domestic product (GDP – the standard measure of the economy’s size) fell by 1.58 percent at an annual rate adjusted for inflation, and the pretty reliable forecasters at the Atlanta branch of the Federal Reserve system expect about the same kind of contraction for the second quarter.

If this prediction holds, the United States will have entered a recession by the most widely used yardstick – two straight quarters of what economists call “negative growth.”   

Manufacturing production – which RealityChek regulars know has held up very well during the pandemic period – has now dropped sequentially for two straight months. And a downshifting U.S. economy is importing less, which has reduced the bloated trade deficit for two straight months as well.

The employment picture is better (including in manufacturing) but on an economy-wide basis some signs of deterioration are visible as well. Chiefly, if you look at three-month averages (which help smooth out often misleading short-term fluctuations, you see that from January through March, this measure of private sector job growth totalled 527,000. From April through June, it dropped to just under 362,000, and may sink lower, as the April and May figures have been downwardly revised, signaling that the same may be in store for June’s results.

Some of the best evidence of declining affordability – across the board – come from the official retail sales figures. On an annual basis, their increase is down from the mid-double digit levels of January and February (propped up by the unusually weak numbers from the heavily pandemic-affected figures for the previous – baseline – winter), to 9.26 percent in June.

That may not sound like a lot, but when inflation is considered, these retail sales increases turn into decreases for three of the last four months through June’s preliminary report. In other words, because of rapidly rising prices, consumers weren’t actually buying more in the way of goods and services. They were simply paying more for quantities that had actually shrunk. And the month-on-month sales numbers have been negative for three of the last four months, too.

The affordability issue is especially clear from the recent decrease in gasoline prices. Yes, they’ve tumbled for more than a month. But less driving is the obvious reason. For example, here we are in the middle of peak summer driving season, when the subsiding of the pandemic supposedly has millions of Americans determined to engage in so-called “revenge travel.”

But according to the U.S. Energy Information Administration, gasoline consumption “is just above the same time two years ago [when revenge travel was popular, too, as the virus’ first wave receded, but was still taking a much bigger toll than today] but below every other year going back to 2000.”

The American Petroleum Institute added that last month’s 9.1 million barrels per day of demand was “down 2.3% y/y compared with June 2021—a third straight month in which gasoline trailed its year-ago levels.” Moreover, so far, this year’s May-June increase of 0.4 percent in gasoline use has badly “lagged the average 2.9% seasonal increase seen between May and June in 2012-2021.”

Meanwhile, the role of higher interest rates (and consequently tighter credit) is best seen in the housing market. Summarizing the latest findings of the National Association of Realtors, The Wall Street Journal just reported that “sales of previously owned homes fell for a fifth straight month, dropping 5.4% in June to an annualized rate of 5.12 million.”

The main reason? The big run up in mortgage rates has depressed mortage applications for three straight weeks has pushed them down to their lowest levels since 2000. That means they’re below where they were even during the deflation of the mid-2000s housing bubble that helped trigger the global financial crisis and Great Recession.

Most important of all, even those believing that American leaders deserve credit for figuring out a successful anti-inflation fighting strategy, should remember that although interest rates are higher, they’re far from historically high and even fall well short of even recent very low norms; and that even though some prices are down, they’re still historically high. And that’s not even considering that the supply chain troubles also contributing to recent inflation could well intensify as long as the Ukraine war drags on, and the threat of more over-the-top Zero Covid lockdowns in China can’t be dismissed.

So even though this kind of bitter policy medicine is needed to avoid worse inflation down the road, and genuinely harsh austerity measures (especially as long as U.S. leaders seem to lack a clue regarding the inflation-fighting potential of productivity growth improvement), American voters aren’t likely to be grateful this November – or in any elections in the foreseeable future. And who could blame them?

 

(What’s Left of) Our Economy: Continued Worsening Both for America’s Growth and its Trade Deficit

Tags

exports, GDP, goods trade, gross domestic product, imports, inflation, real GDP, real trade deficit, recession, services trade, Trade, trade deficit, {What's Left of) Our Economy

The final (for now) official U.S. report on the change in the economy’s output (gross domestic product, or GDP) during the first quarter of this year came in this morning, and just as the estimates of sequential shrinkage have gotten slightly worse since the initial read two months ago, so did the estimates of the nation’s trade deficit. As known by RealityChek regulars, that’s one of the worst combinations of economic data possible.   

And although the growth-cutting impact of these swelling trade shortfalls remained unrevised from the 3.23 percentage points recorded in the previous GDP read, it’s still bigger than the 3.20 percentage points estimated in the initial release, and sizable by any measure. Indeed, it was big enough to represent the difference between quarterly growth and quarterly contraction.

First, the overall GDP results. The Commerce Department now judges the economy to have shriveled by 1.58 percent at annual rates after adjusting for inflation. (The measure most widely followed.) That’s worse than both the second estimate (a 1.52 percent decline) and the first read (1.42 percent). This confirmation of first quarter contraction, moreover, means that the economy has now officially proceeded halfway toward a recession according to the most common definition: two straight quarters of real GDP decreases.

The trade gap has widened similarly – from the initially reported inflation adjusted and annualized $1.5417 trillion to $1.5435 trillion to today’s $1.5447 trillion.

This total amounts to a new all-time quarterly high, and the seventh straight such record registered. The real growth bite of this deficit wasn’t a record in absolute terms. That distinction belongs to the third quarter of 2020. But that period’s 3.25 percentage point hit to inflation-adjusted GDP came in the context of that quarter’s roaring comeback from the short but deep CCP Virus-induced downturn from earlier that spring. So the trade deficit’s impact was barely noticed.

Without such a big (14.41 percent) sequential jump in the trade deficit, the economy would have expanded by 1.65 percent at real annual rates in the first quarter – no great shakes by any means, but certainly better than a slump.

In addition, on a relative basis, the 3.23 percentage point drag on first quarter growth stayed the biggest ever – slightl eclipsing the 3.22 percent drag on the 1.53 percent total real GDP contraction way back in the second quarter of 1982.

Moreover, the quarter-to-quarter swing in the trade gap’s growth impact – from a 0.23 percentage point hit during the fourth quarter – was the biggest since mid-2020, when the 1.53 percentage point boost to growth in the second quarter became a 3.25 percentage point subtraction in the third quarter.

And for good measure, the sequential swing in the trade gap’s absolute growth impact between the fourth quarter of 2020 – when a small worsening of the inflation-adjusted trade deficit subtracted just 0.23 percentage points from growth – to the first quarter remained the biggest since mid-2020. Then, a percentage point boost to growth in the second quarter became a 3.25 percentage point subtraction in the third quarter. But again, that latter figure came during a quarter of 30.19 percent annualized constant dollar growth!

The newest increase in the price-adjusted quarterly trade deficit also generated a new record in terms of its share of the overall economy. As of today, the real trade gap represents 7.83 percent of inflation-adjusted GDP – compared with the 7.82 percent calculable last month.

One bottom line: The after-inflation trade deficit is now 82.24 percent higher than in the fourth quarter of 2019 – the last quarter before the CCP Virus’ arrival began seriously affecting and especially distorting the economy. That’s not so far from a doubling.

Today’s GDP report showed that total inflation-adjusted exports fared a little better in the first quarter than first estimated. The new $2.3613 trillion inflation-adjusted annualized figure is 0.15 percent higher than the second read’s and 0.29 percent above the first’s.

Yet these overseas sales are still down 1.23 percent from last year’s fourth quarter and fell sequentially for the fourth time in the nine quarters that have passed since the first pandemic-affected quarter (the first quarter of 2020). Further, these exports are still 7.52 percent lower than immediately before the virus’ arrival in force, in the last quarter of 2019.

The total first quarter real imports numbers, however, have continued to rise, too. This morning’s constant dollar annualized figure of $3.9060 trillion was up 0.12 percent from the second read and 0.25 percent from the first.

As a result, the first quarter remains the new record-holder for quarterly total after-inflation imports, and the all-time high is still the fifth in a row. The sequential increase of 4.42 percent, moreover, is still the biggest since the 17.29 percent explosion between those second and third quarters of 2020, and total price-adjusted imports are now up 14.85 percent since that last pre-pandemic fourth quarter of 2019.

Interestingly, the new GDP report also confirmed that the nation’s trade in goods has been improving modestly while trade in services – not only the economy’s biggest sector, but the one hit hardest by the pandemic – has been deteriorating.

In this vein, the final estimate of the real goods trade deficit came in at $1.6572 trillion at annual rates. That figure is 0.65 percent smaller than that in the second GDP report, and 0.68 percent less than the initial result.

At the same time, the new total is still a seventh straight record, and the increase of 12.88 percent over the $1.4681 trillion gap reported for the fourth quarter of last year remained the biggest sequential increase since the 20.40 percent surge between the second and third quarters of pandemic-ridden 2020. Moreover, the new first quarter total is 54.68 percent higher than the $1.0714 trillion during the fourth quarter of 2019 – the last data quarter before the CCP Virus began playing havoc with the economy and economic data.

By contrast, the new estimate shows that the chronic U.S. services trade surplus keeps decreasing. The latest figure for the first quarter – $109.3 billion in real terms at annual rates – was fully 8.15 percent lower than the second estimate and 9.59 percent smaller than the first. Due to this third estimate, the services surplus fell by 9.88 percent from the fourth quarter’s $120.1 billion real annualized total, and has been cut by more than half (51.79 percent) from its $226.7 billion level in the immediate pre-pandemic fourth quarter of 2019.

The goods and services trade divergence has marked both the export and import performances comprising the above trade balance figures. For goods exports, the final estimate for the first quarter ($1.7577 trillion annualized and adjusted for inflation) was up 0.33 percent from the second estimate and 0.54 percent from the first.

But real goods exports still dropped by 1.97 percent between the last quarter of 2019 and the first of 2022, this sequential fall-off (like that for total real exports) remains the fourth in the nine pandemic-affected quarters, and it’s still the biggest such decrease since that registered between the first and second quarters of pandemic-y 2020 (23.08 percent). And since the fourth quarter of 2019, goods exports are still off by 1.39 percent.

By contrast, constant dollar goods imports results have come down during the first quarter – though not in a straight line. The new total of $3.4149 trillion on a real, annualized basis is 0.15 percent below the second read but just 0.05 percent below the first.

Today’s real goods imports figure, though, was also the second straight all-time high and a 4.72 percent increase over the fourth quarter figure – the greatest sequential increase since the 6.80 percent rise in the fourth quarter of 2020. These imports, moreover, are now 19.66 percent above their fourth quarter, 2019 level.

The after-inflation services exports estimates, however, kept weakening in the first quarter GDP reports. The $631.5 billion real annualized total reported today was a 0.61 percent improvement over the fourth quarter’s $627.7 billion, the second straight quarterly gain, and the best quarterly result since the $695.3 billion recorded in he first quarter of 2020.

But it was down 0.28 percent from the second read and 0.33 percent from the first. and since the final pre-pandemic fourth quarter of 2019, these exports have plunged by 18.38 percent.

As for the price-adjusted services imports estimate, it grew quickly in the first quarter. The third read of $522.2 billion at price-adjusted annual rates is 1.54 percent higher than the second and 1.85 percent above the first. And these purchases were 2.88 percent higher than the fourth quarter total.

This final (for now!) first quarter after-inflation services imports figure is the highest since the $547 billion figure for the fourth quarter of 2019. But since then, these purchases have sagged by 4.53 percent.

A glass-half-full type might point out that this final first quarter GDP report — and the last few official monthly trade releases, might represent peak trade deficit for the United States.  But a glass-half-empty type tight counter that the main reason could be an economic slowdown and possibly imminent recession that would primarily — and finally — depress Americans’ importing and other spending. That’s hardly the ideal formula for narrowing the trade gap and indebtedness it fuels.  But it’s one that seems unavoidable for now.         

Making News: Back on National Radio Tonight Talking China Tariffs and Inflation…& More!

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Biden, Biden administration, Breitbart.com, CBS Eye on the World with John Batchelor, China, GDP, Gordon G. Chang, inflation, Janet Yellen, John Carney, Making News, tariffs, trade deficit

I’m pleased to announce that I’m scheduled to return tonight to “CBS Eye on the World with John Batchelor.” The segment, slated to air at 11:15 PM EST, will feature John, me, and co-host Gordon G. Chang discussing a bad recent idea that can’t seem to be killed off entirely – proposals to fight lofty U.S. inflation by cutting tariffs on some goods imports from China.

You can listen live at this link, and as usual, I’ll be posting a link to the podcast as soon as one’s available.

In addition, it was great to see my latest post on the trade deficit’s damaging impact on the shrinkage suffered by the U.S. economy in the first quarter of this year cited last Thursday by Breitbart.com‘s John Carney. Here’s the link.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.