(What’s Left of) Our Economy: The New U.S. GDP Report Shows the Economy Not Just Shrinking but Bubblier Than Ever

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bubbles, GDP, global financial crisis, Great Recession, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, toxic combination, {What's Left of) Our Economy

For an official report showing that the U.S. economy shrank, the Commerce Department’s initial read on the gross domestic product (GDP – the leading measure of the economy’s size) for the first quarter of this year garnered lots of good reviews. (See, e.g., here and here.)

According to these cheerleaders, when you look under the hood and examine why GDP fell, the details are encouraging – and even point to growth resuming shortly. I’m not so sure about that – and especially about the claim that the skyrocketing trade deficit so largely responsible for the negative print is only an accounting phenomenon that results from the peculiar way GDP changes are calculated, and therefore says nothing about the economy’s main fundamentals. (Indeed, I’ll have more to say on this point later this week.)

But if we’re going to examine carefully the components of the economy’s growth and shrinkage, let’s examine them all. Because some other key details of the latest GDP report – and some immediate predecessors – draw a more troubling picture. They show that the economy is looking even more bubble-ized than in the mid-2000s, when expansion became over-dependent on booms in consumer spending and housing, neglected the income, savings, and investment needed to generate sustainable growth, and inevitably imploded into the global financial crisis and ensuing Great Recession. 

The pre-crisis bloat in personal consumption and housing is clear from the magnitude they reached at the bubble-era’s peak. In the third quarter of 2005, this toxic combination of GDP components accounted for a then-record 73.90 percent of the total economy after inflation (the measure most widely followed) on a stand-still basis. And for that quarter, they were responsible for 85.26 percent of the 3.45 percent real growth that had taken place over the previous year.

During the first quarter of this year, consumer spending and housing accounted for 88.17 percent of the 3.57 percent real growth that had taken place since the first quarter of 2021. (Remember – inflation-adjusted growth for all of 2021was a strong 5.67 percent.) And on a stand-still basis, the toxic combination made up a new record 74.04 percent of the economy in price-adjusted terms. 

For the full year 2021, personal spending and housing represented 73.78 percent of inflation-adjusted GDP on a stand-still basis, and generated 101.5 percent of its constand dollar growth.  (Some other GDP components acted as drags on growth.) That stand-still number topped the old full-year record of 73.68 percent (also set in 2005) and share-of-growth figure trailed only the 114.3 percent in very-slow-growth 2016.    

There are three big differences, though, between the peak bubble period of the mid-2000s and today. Back then, the federal funds rate – the interest rate set by the Federal Reserve that strongly influences the cost of credit, and therefore the economic growth rate for the entire economy, was about four percent. Today, it’s in a range between 0.25 and 0.50 percent. That is, it’s only about a tenth as high.

In addition, the Fed hadn’t spent years stimulating the economy by buying tens of billions of dollars worth of government bonds and mortgage-backed securities each month. This disparity alone justifies concern about the health and durability of the current economic recovery. Finally, inflation during that bubble period was much lower.

Even worse, these purchases have now stopped and the central bank has made clear its determination to bring torrid current inflation down by raising interest rates. If these tightening moves cut back on toxic combination spending, it’ll be legitimate to ask where else adequate levels of U.S. economic growth are going to come from, and whether policymakers will try to revive the expansion in an even bubblier way.  

(What’s Left of) Our Economy: Trade-Wise, the New U.S. GDP Report Reveals the Worst of All Worlds

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currency, dollar, exchange rates, exports, GDP, goods trade, gross domestic product, imports, inflation, inflation-adjusted growth, real GDP, real trade deficit, services trade, trade deficit, {What's Left of) Our Economy

The U.S. economy’s quarterly shrinkage in the first quarter of this year that U.S. government data just revealed – the first such inflation-adjusted decline since the darkest days of the CCP Virus pandemic in the second quarter of 2020 – was led by leaps and bounds by a soaring and all-time record quarterly U.S. real trade deficit.

Even as the gross domestic product (GDP – the chief measure of the economy’s size) fell sequentially in price-adjusted terms by 1.42 percent at annual rates, the after-inflation trade gap swelled to a record $1.5417 trillion by the same measure. In other words, the trade deficit and growth arrows are moving in the worst possible combination of ways.     

This ballooning reduced real GDP in the first quarter by 3.20 percentage points – the biggest such subtraction in absolute terms since the 3.25 percentage point loss recorded in the third quarter of 2020 (when the economy was rapidly recovering from the deep downturn induced by the first CCP virus wave).

Had the price-adjusted trade deficit simply stayed the same in the first quarter, the economy would have actually expanded by 1.78 percent at annual rates.

Moreover, this soaring constant dollar trade deficit’s hit to growth was the greatest since the second quarter of 1982, when the shortfall’s sequential surge reduced growth by 3.22 percentage points as the economy shriveled by 1.53 percent after inflation. And for good measure, the quarterly swing in the trade deficit’s effect on growth (from a 0.23 percentage point subtraction) was the greatest in absolute terms since that first pandemic recovery between the second and third quarters of 2020 – when the impact changed from a 1.53 percentage point boost to growth to a 3.25 percentage point contraction.

The first quarter’s record trade deficit was the seventh straight, and the 14.19 percent sequential widening was the biggest since the 31.81 percent jump between the second and third quarters of 2020 – again, when the economy was bouncing back rapidly from that pandemic-induced cratering, not contracting. In fact, these latest GDP figures revealed the first time that both the economy shrank and the trade deficit grew since the first quarter of 2020 – when the virus’ economic impact was first starting to be felt.

At least as bad, at 7.81 percent of real GDP in the first quarter, the relative size of the inflation-adjusted trade deficit blew past the old record of 6.82 percent – set in the previous quarter. Since the fourth quarter of 2019, the final quarter before the CCP Virus began impacting the U.S. economy significantly, the overall inflation-adjusted trade gap is up by fully 81.89 percent.

Nor did the all-time and multi-month worsts stop with the total real trade deficit.

The first quarter real goods trade deficit of $1.6685 trillion annualized was the seventh straight record and the 13.65 percent increase over the fourth quarter tota was the biggest sequential rise since the 20.40 percent between the second and third quarters of 2020 – during that early pandemic recovery. Since the CCP Virus era began, the after-inflation goods trade shortfall has worsened by 55.73 percent.

The firist quarter’s services trade surplus of $120.9 billion annualized was actually slightly higher than the fourth quarter’s $120.1 billion, and represented the third straight quarter of improvement. The absolute level, moreover, was the highest since the $152.4 billion recorded in the second quarter f 2021. But since the fourth quarter of 2019, the services surplus is down by 44.46 percent, reflecting the uusually hard virus-related blows this portion of the economy has suffered.

Inflation-adjusted combined goods and services exports dipped by 1.51 percent on quarter – from an annualized $2.3906 trillion to $2.3545 trillion. The drop was the fourth in the nine quarters since that first pandemic-affected first quarter of 2020. On a quarterly basis, total U.S. constant dollar exports are down 7.79 percent since the last pre-pandemic fourth quarter of 2019.

Yet total imports achieved their fifth straight quarterly record, reaching $3.8963 trillion in real terms at annual rates. The 4.16 percent sequential increase was only slightly smaller than the 4.21 percent rise in the fourth quarter of last year. These imports are now 14.57 percent greater than they were in the immediate pre-pandemic fourth quarter of 2019.

Goods exports sank by 2.50 percent on quarter, from an after-inflation $1.793 trillion at annual rates to $1.7482 trillion. The sequential drop was also the fourth in the nine quarters since the pandemic first arrived in the United States and the biggest since the 23.08 percent collapse in the second quarter of 2020. Quarterly goods exports have now decreased by 1.92 percent since the fourth quarter of 2019.

Constant dollar goods imports grew by 4.77 percent in the quarter, from $3.2611 trillion annualized to a second consecutive record of $3.4167 trillion. The increase was the third in a row, and its rate was the fastest since the 6.80 percent for the fourth quarter of 2020. On a quarterly basis, these overseas purchases have surged by 19.72 percent since just before the pandemic struck in force.

Real services exports climbed 0.94 percent sequentially in the first quarter, from $627.7 billion at annual rates to $633.6 billion. This second straight advance propelled these sales to their highest absolute level since the first quarter of 2020’s $695.3 billion. At the same time, quarterly-wise, inflation-adjusted services exports have plummeted 18.11 percent from immediate pre-CCP Virus levels.

Real services imports rose one percent sequentially in the first quarter, and the increase from $507.6 billion to $512.7 billion annualized sent them to their highest level since that immediate pre-pandemic fourth quarter of 2019. But these results still left these purchases 6.27 percent below that $547 billion annualized number.

And the lousy trade news doesn’t seem likely to stop, even if U.S. economic growth continues to under-perform because of multi-decade high inflation, Federal Reserve efforts to tame it by slowing the economy via monetary policy tightening, and ongoing supply chain disruptions due to China’s Zero Covid policy and the Ukraine War.

The main reasons? First, growth overseas is much more vulnerable to supply chain issues than American growth, and all else equal, relative U.S. economic strength will surely pull in more imports and crimp exports. Second, as of today, the U.S. dollar’s recent rise has brought the greenback to its highest level in twenty years, which will increase the cost of American exports versus the global competition and decrease the cost of U.S. imports versus the domestic competition. And finally, the Biden administration has been dropping broad hints that it will cut tariffs on many imports from China before long – ostensibly to help fight inflation.

(What’s Left of) Our Economy: With or Without Inflation, Last Year Was Awful for U.S. Trade

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

This entry represents my first effort to catch up on U.S. economic data released while I was on jury duty last week, and will cover the latest inflation-adjusted trade figures – which carry the story though the fourth quarter of last year and therefore the full year, and seem to me especially important because inflation has been so much hotter lately than what Americans have gotten used to for decades.

At the same time, the big picture they draw is very similar to that created by the full-year 2021 pre-inflation trade figures, which came out February 8: Last year was lousy in record terms for America’s trade flows, even if a few reasons for optimism can be seen.

The lousy records start with the annual price-adjusted total trade deficit: At $1.2843 trillion, the 2021 level was the second straight yearly all-time high. And the 36.24 percent increase over 2020’s $942.7 billion was the biggest since 1999’s 47.97 percent (when the much smaller absolute numbers made such huge relative increases much easier to generate).

The fourth quarter of 2021 was even more record-y. Its $1.3501 trillion annualized total was the sixth straight quarterly record. But at least the sequential rise of 2.54 percent was far from a record. In fact, it was downright modest compared with the 5.79 percent quarterly increase in the third quarter, the 8.24 percent sequential rise registered in the first quarter, much less the 31.81 percent burst of the second quarter of 2020, when the economy was rebounding so strongly from the sharp downturn caused by the CCP Virus’ first wave and related lockdowns and behavioral curbs. That’s the greatest jump in nearly 40 years – since the 33.82 percent in the third quarter of 1983 (when again, the absolute numbers were much smaller.

Viewed in context, moreover, the price-adjusted trade deficit picture is equally bad. As a share of after-inflation gross domestic product (GDP – the standard measure of a national economy’s size) the real trade deficit reached 6.61 percent – breaking the old record of 6.14 percent set in 2005.

On a quarterly basis, the fourth quarter of 2021’s constant dollar trade deficit of 6.76 percent of constant dollar GDP was a new all-time high as well, eclipsing the 6.43 percent of the first quarter.

Moreover, these figures aren’t just of academic interest. The real trade deficit’s year-on-year surge chopped 1.40 percentage points off of 2021’s annual growth. In other words, rather than the 5.67 percent recorded, the economy would have expanded by 7.07 percent. That’s the biggest loss in absolute terms since the trade shortfall’s increase reduced inflation adjusted growth by 1.54 percentage points in 1984.

In addition, the 2021 annual increase in the trade deficit’s subtraction from real growth in absolute terms – from 0.29 percentage points in 2020 – was the biggest since trade turned from a supporter of growth in 1949 (by 0.08 percentage points) to a subtractor of 1.28 percentage points in 1950.

Relatively speaking, though, the 2021 trade bite from growth looks just slightly better. It’s only the biggest since the deficit’s increase reduced 2015’s 2.71 percent price-adjusted GDP growth by 0.78 percentage points, or 28.78 percent.

In quarterly terms, however, the impact of the trade deficit’s increase on after-inflation growth looks better still. Whereas this increase chopped 1.26 percentage points off the sequential real GDP improvement of 2.28 percent at an ainnual rate in the third quarter of last year, it subtracted only 0.23 percentage points from the much stronger sequential 6.72 percent annualized advance in the fourth quarter .

Regarding the components of the inflation-adjusted trade deficit, total real exports in 2021 were up 4.53 percent – the fastest pace since the 12.88 percent jump in 2010, as the economy was recovering from the Great Recession that followed the 2007-08 global financial crisis. But the $2.3075 trillion amount was still 9.71 percent below the all-time high of $2.5556 trillion, achieved in 2018.

Last year’s after-inflation total imports, however, did set a new record. At $3.5919 trillion, they topped 2020’s $3.1503 trillion level, by 14.02 percent and the old (2019) mark of $3.5492 trillion by 1.20 percent. The latest annual growth rate, moreover, was the greatest since they soared 24.34 percent in 1984 – when, again, the absolute levels were much smaller.

On a quarterly basis, the $2.3906 trillion annualized in combined goods and services exports for the last three months of last year represented a 5.17 percent rise from the third quarter’s $2.2730 trillion. The improvement was the fastest since the fourth quarter of 2020’s 5.20 percent, but the total was 6.81 percent below the record of $2.5653 trillion, from the first quarter of 2019.

Total imports for that fourth quarter, though, were the fourth straight all-time high. At $3.7408 trillion, they bested the previous quarter’s by 4.21 percent.

The final catch-up item: The February inflation rates according to the Federal Reserve’s preferred gauge – which were issued last Thursday. Hoping I can report on them tomorrow – but life sure has taken some interesting turns lately!

(What’s Left of) Our Economy: Lots of U.S. Growth – & Even More Inflation

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Biden, consumer price index, CPI, GDP, gross domestic product, inflation, inflation-adjusted growth, inflation-adjusted wages, real GDP, State of the Union, wages, {What's Left of) Our Economy

With President Biden’s State of the Union address coming up tonight, a Bloomberg.com headline the other day nicely summed up a major feature of commentary on the economy over the last year: “Inflation Pain Means Biden Gets No Credit for Roaring Economy.”

At least the article lacked the infantile and indeed ignorant “No fair!” tone of many other articles and remarks focusing on the contrast between the downbeat national mood on the state of the economy and the strong data being reported on its actual performance in terms of generating growth and jobs. (See here for my takedown of one leading example.)

As I explained, these complaints are ignorant (or deceitful, depending on your assessment of the complainer) because inflation is so high nowadays that it’s outstripping wage increases on the whole – which means that Americans (and especially the vast majority who rely on wages – and salaries – for the vast majority of their income) are experiencing falling living standards.

The Bloomberg piece thankfully didn’t display any of this whininess. But the headline suggests at least that Mr. Biden deserves at least some credit for the “roaring economy,” – which is a problem. That’s because especially when you look at inflation, too, the economy’s growth rate during his first year in office is anything but impressive. In fact, it looks like nothing more than the latest display by official Washington (including the Federal Reserve) that pumping unheard of amounts of money into the system will inevitably stimulate a certain amount of net positive economic activity – at least for a while.

Specifically, during that first Biden year in office, as fast as the economy expanded after stripping out the effects of rising prices (5.7 percent), it still increased more slowly than the inflation rate (7.0 percent as measured by the Consumer Price Index – CPI). And at least as important, economic growth trailing the inflation rate – in other words, output expanding while the typical American’s paycheck shrinks in real terms – hasn’t been the slightest bit common in recent decades.

During the pre-pandemic economic recovery that began in mid-2009 through the CCP Virus- and lockdowns-marked recessionary year 2020, the growth of inflation-adjusted GDP (gross domestic product, the U.S. government’s standard measure of the economy’s size and rate of change), trailed the inflation rate just once – in 2011. (The inflation data come from here, except for the 2021 number, which I took from the Labor Department. The GDP figures from the Commerce Department tables I always use.)

Further, from the beginning of this century through 2020, these results have appeared only six times – and three of those instances occurred during the bubble years of the century’s first decade. Since that economic story ended in the global financial crisis and worst downturn since the Great Depression of the 1930s, that’s kind of sobering.

Worse, the last time in U.S. economic history when inflation routinely exceeded after-inflation growth was from the mid-1960s through the early 1980s. That’s bad because that era was one of stubbornly high inflation – and because it’s not a time that evokes even minimally satisfactory economic memories for those who lived through it (like me).

I’d choose 1966 as the beginning of that inflation-prone period – not because prices were rising at such torrid rates (at least by subsequent standards) but because they’d abruptly doubled – to three percent from 1.6 percent. In addition, three percent hadn’t been seen since the mid-1950s (according to the table here, whose data differs slightly with the source used above). So it’s not surprising that inflation helped Republicans eat meaningfully into long-time Democratic Congressional majorities in that year’s offyear elections during the Democratic Johnson administration.

From that point, until 1983, when inflation slowed significantly basically because the Federal Reserve engineered two painful recessions, the CPI topped real GDP growth no fewer than 14 out of 18 years.

It’s anyone’s guess whether current inflation will produce comparably awful results. But it’s explaining how he’ll help avoid that scenario, and foster acceptable growth without high inflation, that should be on the President’s mind tonight – not wondering why the nation isn’t more appreciative of its roaring economy.

(What’s Left of) Our Economy: A (Lasting?) Turn for the Better in U.S. Trade Flows

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

Here’s how bad America’s recent trade performance has been – at least in inflation-adjusted terms: Yesterday’s first official read on real economic growth in the fourth quarter of 2021 showed that the sequential change in the price-adjusted trade deficit neither added to nor subtracted from the 6.71 percent increase in the price-adjusted gross domestic product (GDP) at annual rates. And that was the best such trade-related result since the second quarter of 2020 – when the peak of the first wave of the CCP Virus stateside tanked the trade deficit because the entire economy crashed.

For the full year last year, the story was much different and much worse – indeed historically so. More on that later. For now, let’s just observe that the latest, better quarter-to-quarter numbers are still noteworthy. Nonethless, although because the CCP Virus isn’t yet in the rearview mirror, and America’s public health authorities are showing little recognition that the decreasing severity of successive strains safely permits faster progress toward normalizing economic and other aspects of life again, it’s still too early to declare that a normalization of trade flows is truly in sight.

The combined goods and services trade deficit rose by 1.63 percent between 2021’s third and fourth quarters, from $1.3166 trillion to $1.3380 trillion. The latter is the sixth straight quarterly record, but the 1.63 percent rate of increase was the second slowest of the pandemic period – behind only the 1.50 percent widening between the first and second quarters of last year.

Moreover, that quarterly increase was too small to either speed up the economy’s growth or slow it down. And this zero effect was also the best in this series since that second quarter of 2020 – when the recession-induced drop in the gap added 1.53 percentage points to growth. (That said, this boost was awfully modest given that the economy shrank by a nauseating 31.2 percent at annual rates that was by far the worst such performance since the Commerce Department began putting out quarterly GDP statistics in 1947.)

Much better – the sequential improvement in the real trade gap’s impact on growth (from the 1.26 percentage point subtraction during the third quarter) was the biggest since the 1.58 percentage point turnaround between the first and second quarters of 2020.

And perhaps best of all in this vein – between the third and fourth quarters, the economy’s constant dollar growth sped up strongly (from the 2.28 annualized rate in the third quarter) with hardly any deterioration in the trade shortfall. Nonetheless, the real trade deficit as a share of real GDP dipped only fractionally from the record 6.76 percent reached in the third quarter.

Total price-adjusted exports advanced sequentially in the fourth quarter from $2.2730 trillion annualized to $2.4009 trillion. This 5.63 percent surge was the greatest since the 11.49 percent jump in the third quarter of 2020, when the economy was bouncing back strongly from the deep slump triggered by the virus’ first wave. But the absolute level is still significantly below the record of $2.5829 trillion in the second quarter of 2018.

The much greater amount of total imports increased as well, but by a slower 4.16 percent. The $3.7389 trillion annualized total, however, was the fourth straight quarterly record,

The fourth quarter goods trade deficit of $1.4601 trillion annualized was a more discouraging result. It was not only the sixth straight quarterly record, but the 2.72 percent increase was the fastest since the first quarter’s 6.36 percent.

Goods exports improved by 5.61 percent sequentially in the fourth quarter, from $1.7013 trillion to $1.7967 trillion annualized. The increase was the best since the 5.87 percent achieved in the fourth quarter of 2020, but the total was still somewhat below the all-time high of $1.8203 trillion in the second quarter of 2018.

Goods imports of $3.2586 trillion annualized, however, were a record, Their 4.29 percent sequential growth rate was strong, too, and also the highest since the fourth quarter of 2020 (6.80 percent).

In contrast to goods, the after-inflation service trade surplus registered its first expansion since the pandemic’s arrival in the United States in the second quarter of 2020,with the fourth quarter’s $124.4 billion annualized total coming in 16.04 percent better than the third quarter’s $107.2 billion.

Even so, the fourth quarter figure makes clear how hard services trade has still been hit by the pandemic when adjusted for price changes. That third quarter figure stemmed from an utterly unprcedented 29.66 percent sequential collapse of the surplus. Indeed, during the first quarter of 2020, the final data quarter before the pandemic began roiling the U.S. economy, the annualized services surplus stood at $200.9 billion.

Real services exports led the way, growing by 5.69 percent on quarter – the best such performance since the 5.83 percent of the fourth quarter of 2006.  Yet the $633.9 billion total at annual rates was still 18.82 percent below the peak of $780.9 billion, reached in the first quarter of 2018.

Constant dollar services imports rose as well, but only by 3.51 percent.  And at $509.5 billion annualized, this latest quarterly total remained 7.75 percent less than these purchases all-time high – the $552.3 billion in the third quarter of 2019. 

Turning to the annual results, the 2021 combined goods and services trade gap of $1.2813 trillion smashed the old record of $942.7 billion set in 2020 by 36.62 percent. The all-time high was the third straight, and the rate of increase by far the fastest ever (at least going back to 2002, when the Commerce Department began presenting the combined deficit figure), topping 2015’s 25.45 percent runner-up.

Further, the bite out of the change in real GDP taken by this deficit increase swelled in both relative and absolute terms. In 2020, the shortfall’s increase worsened that year’s 3.40 percent slump in price-adjusted GDP by 0.29 percent points. In other words, the trade gap’s rise accounted for 8.53 percent of the decline.

Last year, the rise of the trade deficit cut 1.39 percentage points out of constant dollar growth of 5.67 percent. In other words, it reduced that year’s growth by 19.69 percent. In these relative terms, that’s the biggest subtraction from growth since the deficit’s increase in 2015 sliced 0.78 percentage points out of that year’s 2.71 advance in real GDP , thus reducing the increase by 22.35 percent.

But it’s still a far cry from 1958, where the price-adjusted trade deficit’s increase reduced growth by 117.57 percent – literally overwhelming all the other parts of the economy that were expanding (though on net modestly). Specifically, without the 0.87 percentage point trade deficit hit, real GDP would have eaked out a 0.13 percent annual expansion rather than a 0.74 percent dip.

In absolute terms, that 1.39 percentage point drag on real growth in 2021 was the biggest annual total since 1984’s 1.54 percentage points out of 7.24 percent growth.

At 6.60 percent of real GDP, the full-year 2021 inflation-adjusted combined trade deficit easily topped the previous mark of 6.14 percent set in 2005, and the 28.65 percent rise in this figure was the fastest rate going back to 2002.

Inflation-adjusted total exports did climb by 4.64 percent in 2021 – from $2.2076 trillion to $2.3101 trillion. The rate of increase was the best since 2011’s 7.17 percent. But the total is still 9.61 percent below the record of 2,5556 trillion set in 2018.

Constant dollar combined goods and services imports did reach an all-time high in 2021, with the $3.5914 trillion total breaking the previous record of $3.5492 (set in 2019) trillion by a healthy 3.82 percent. And the 14 percent yearly rise the fastest since the 16.21 percent pop in 1988.

The real goods trade deficit of $1.4198 trillion in 2021 was 24.17 percent higher than 2020;s $1.1434 trillion figure. Both the latest total and the yearly increase were records (again, going back to 2002).

Inflation-adjusted goods exports rose by 7.64 percent on year in 2021, from $1.6068 trillion to $1.7296 trillion. The rate of increase was the fastest since the 15.14 percent recorded in 2010 – early in the recovery from the Great Recession that followed the global financial crisis. But the absolute level is 3.36 percent below 2018’s all-time high of $1.7897 trillion.

After-inflation goods imports did set a record in 2021 – $3.1494 trillion – while the 14.51 percent annual increase was the fastest since the 15.38 percent, also reached in 2010.

The ongoing pain in services trade was visible in the 1.30 percent annual decline in services exports in 2021, from $617.2 billion to $609.2 billion. The total was the lowest since the $572.7 billion during the Great Recession year of 2009, and the drop was the first since a fractional loss in 2016 – the only other year on record seeing a decrease. These transactions, moreover, are off 20.90 percent from the 2018 peak of $770.2 billion.

Last year actually saw a record annual 11.56 percent rise in services imports – from $423.8 billion to $472.8 billion. But the annual total was the second lowest since 2013, and 13.63 percent below the all-time high of $547.4 billion, set in the final pre-pandemic year 2019.

As mentioned near the beginning, between the persistence of the CCP Virus and of federal mitigation approaches that seem increasingly outdated, it’s tough to read too much into the relatively good trade numbers of the fourth quarter. Add to that great uncertainty about how much monetary policy tightening the Federal Reserve is really willing to impose over any serious length of time, and about how long global supply chains will remain snagged for so many reasons (e.g., the difficulty of adding new worldwide semiconductor production capacity quickly, China’s stubborn, lockdowns-obsessed Zero Covid policy) and the future of the inflation-adjusted trade deficit and its effects on growth seem as murky as ever.

(What’s Left of) Our Economy: Another Big Demographic Blow to Those Chinese Century Forecasts

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China, demographics, GDP, gross domestic product, national security, per capita GDP, population, Trade, {What's Left of) Our Economy

China just came out with its final – for now – 2021 population growth figures, and they strengthen the case against the People’s Republic becoming rich and powerful enough to dominate the world before too long. Indeed, combined with stunning recent figures on Chinese performance on a key measure of prosperity, they add to the evidence that far from becoming a “Chinese Century,” the 21^st century is likeliest to become one of Chinese stagnation and even relative decline.

The demographic figures show that China’s population during 2021 increased by only about 480,000 – or 0.03 percent. For comparison’s sake, the U.S. population last year rose by about 392,600 – or 0.10 percent. That rate is widely viewed as alarmingly slow (see, e.g., here), but it’s triple that of China’s. Moreover, China’s population growth has been historically sluggish for the last decade. Its last decennial census revealed an increase of only 72 million between 2010 and 2020 – the smallest rise since the first such headcount in 1953.

Even worse, these developments are entirely consistent with recent authoritative predictions that, if not somehow reversed, China will experience a population bust for the rest of this century that will be nothing less than mind-blowing. Specifically, by 2100, it will fall by fully one half – and be just twice as large as the projected U.S. population (as opposed to being 4.24 times bigger today).

These population trends debunk the Chinese Century forecasts because of a related economic trend – China’s growth in per capita gross domestic product (GDP). This statistic gauges how much total economic output (GDP) a country is generating divided by each one of its inhabitants. If a country’s per capita GDP is growing, then its economy is growing faster than its population, and therefore the average individal is generating more wealth every year, and that therefore there’s more wealth (in theory) to spread among the population each year. If per capita GDP is shrinking, then there’s less wealth being created per person and therefore less available to share.

China’s per capita GDP isn’t shrinking. But according to the International Monetary Fund (IMF), it hasn’t been growing very rapidly, either, for the past forty years despite the country’s very fast overall growth. More important, when it comes to those Chinese Century forecasts, it’s been growing much more slowly than U.S. per capita GDP; the gap has widened greatly; and it’s forecast to continue widening for the next few years at least. And of course, China’s wealth per head as of 2020 was less than one-sixth of America’s to begin with.

If this forecast is correct, and China’s population and per capita GDP keep falling relative to their U.S. counterparts, the strategic and economic implications, as I’ve discussed, are game-changing. They mean that even measured by total size of economy, far from turning in China’s favor, or even narrowing, the U.S.-China gap would double in America’s favor. So the United States would have many more resources to devote to its millitary, or to improving its technological competitiveness, than its chief rival. (Whether Americans wind up spending this money wisely is another question altogether).

Economically, the implications mean that the United States would become a much more promising growth market than China, both in terms of the total sizes of their GDP and in terms of how much wealth the average Chinese and average  American could actually spend.

Interestingly, moreover, these trends played out between 2020 and 2021 alone. On a quarter-to-quarter basis, the United States has been growing faster than China. And America slightly widened its per capita GDP lead.

China of course remains a huge market in absolute terms, and its massive military buildup and impressive technological progress will enable it to keep mounting major and worsening threats to American security, ranging from an attack on global semiconductor manufacturing kingpin Taiwan to the cyberhacking of U.S. government agencies and private businesses (along with their customers). Nor is there any guarantee that Americans will avoid catastrophic policy mistakes or other problems.

But it’s hard to escape the notion that much of America’s China policy in recent decades (the Trump years excepted) was heavily influenced by defeatist attitudes on the part of its leaders (that is, those that weren’t in effect on Beijing’s payroll in one way or another). China’s latest Census results make clear that such gloom, which produced so many decisions that enriched and strengthened China because “There was no alternative,” is getting ever harder to justify.

(What’s Left of) Our Economy: New U.S. Growth Figures Reveal Historic Service Trade Surplus Collapse

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

The second official read on U.S. economic growth for this third quarter of this year, released by Washington last month, showed such marginal change from the advance report – and so paled in importance to other developments (chiefly, faster U.S. inflation) – that I didn’t post my usual analysis of the trade highlights.

This morning, the final (for now) numbers came in, and the results once more underscore how thoroughly the CCP Virus and official mitigation efforts (like lockdowns), voluntary behavior changes, and resulting supply chain bottlenecks keep distorting the economy.

And remember: These statistics on changes in the country’s gross domestic product (GDP) after adjusting for inflation all predate the arrival stateside of the highly infectious Omicron strain of the virus.

More specifically, it’s now clear that the third quarter saw a widening of the U.S. trade deficit despite relatively slow national growth rate (2.28 percent in real terms at annual rates), in contrast to the stabilization of the trade deficit during a second quarter of much stronger (6.56 percent) growth. That’s exactly the opposite of what almost always happens, since faster U.S. economic expansion tends to pull in more goods and services from abroad on net.

In addition, these latest after-inflation U.S. trade figures make clearer than ever that much of the virus-related damage to the nation’s trade flows is concentrated on the services side.

So let’s begin with services trade. The United States has long run an inflation-adjusted surplus in these sectors, and the surplus continued in the third quarter of this year. But at $107.6 million, it was the smallest since the first quarter of 2007 ($106.1 million). Moreover, the surplus shrank all the way from its $152.4 million second quarter level.

That’s a deterioration of just under 30 percent – which is not only the most dramatic narrowing of all time (in a data series that began in 2002), but the most dramatic narrowing by a huge margin. The runner up? The 17.62 percent fall-off between the third and fourth quarters of 2004 (17.62 percent), when the absolute totals were much smaller, and therefore big percentage changes much easier to generate.

Most of this deterioration came on the services imports side. Between the second and third quarters, they jumped by 7.80 percent, to $492.2 million. That rate was the fastest since the 8.30 percent increase in the fourth quarter of last year. Services exports were off sequentially by 1.51 percent, to just under $600 million.

As for the other figures, the combined inflation-adjusted goods and services trade deficit hit $1.3166 trillion annualized in the third quarter, still the fifth straight quarterly record, and an increase of 5.79 percent over the second quarter’s $1.2445 trillion.

That growth rate was much higher than the 1.50 percent between the first and second quarters, but remained the second lowest of the pandemic era.

Significantly, though, that after-inflation trade deficit increase was enough to cut overall third quarter economic growth by a sizable 1.26 percentage points. That’s seven times deeper than the 0.18 percentage point reduction in the second quarter, and means that, had the trade gap remained the same, third quarter real growth would have been 3.54 percent annualized – or 55.26 percent stronger.

In fact, on a relative basis, that was the biggest trade hit to U.S. economic expansion since the fourth quarter of 2018, when the gap’s widening knocked 0.51 percentage points off the feeble 0.89 percent annualized real growth rate.

And in another gloomy worst-ever result, the real trade defiicit as a share of the economy hit 6.76 percent – eclipsing the old first quarter record of 6.43 percent.

The third quarter’s goods deficit of $1.4215 trillion annualized was also just modestly (1.43 percent) higher than the second quarter’s $1.4014 trillion. But it, too, was a fifth straight all-time quarterly high.

Total price-adjusted exports dropped by 1.35 percent sequentially in the third quarter, to $2.2730 trillion annualized. The decrease was the biggest since the 20.44 percent nosedive between the first and second quarters of 2020, when the virus first began distorting trade and the entire economy.

Combined goods and services imports only rose by 1.15 percent, to $3.5896 trillion at annual rates – the best performance in this category since the second quarter of 2020 as well, when they sank 17.24 percent. But the absolute import figure still represented the third straight monthly record.

Constant dollar goods exports sagged during the third quarter, too – by 1.29 percent seqentially – to $1.7013 trillion annualized, while goods imports dipped fractionally from the second quarter’s record $3.1255 trillion annualized to $3.1228 trillion.

With strong GDP growth expected for the fourth quarter of this year, the real trade deficit seems sure to keep extending further into record territory. Unless the virus-distorted economy throws observers yet another curve ball?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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