(What’s Left of) Our Economy: Is Growth’s Quality Again Turning for the Worse?

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

“The consumer will save us,” or some variation thereof, has become a rallying cry for those believing that the U.S. economy will avoid recession, at least for the foreseeable future. For RealityChek regulars, however, it’s a red flag, possibly revealing that too many economy watchers have forgotten, or never learned, the most important lesson of the global financial crisis of the previous decade and the Great Recession it triggered: The quality of American growth matters at least as much as the quantity – and more specifically, economic expansion that’s too heavily reliant on consuming rather than producing is too likely to end in tears.

That’s why last week’s latest official report on America’s economic growth has me somewhat worried. It’s true, as I reported, that it contained some good news on the trade front, showing a continuing Trump administration trend of decent growth rates no longer tightly linked with huge, soaring trade deficits. But the figures (the second look of three looks at the second quarter’s performance – at least for the time being) also confirm major backsliding when it comes to the domestic determinants of healthy and unhealthy growth – a big surge in the role of consumption and housing combined as growth engines. That’s exactly the toxic combination that inflated the last decade’s historic bubble. And it could become a reversal of a positive Trump-period trend.

According to those official data, consumption and housing in the second quarter fueled 150 percent of that period’s 2.02 percent annualized inflation-adjusted growth – the most closely followed measure of change in gross domestic product (GDP – economists’ term for the economy as a whole). A figure greater than 100 percent, by the way, is possible because other components of GDP can subtract from growth – and in the second quarter, obviously did..

That 150 percent figure is the biggest by far since the third and fourth quarters of 2015. The only saving grace for that figure is that back in 2015, much stronger performance in personal consumption and housing was producing only roughly comparable overall growth.

The second quarter numbers are somewhat better on a standstill basis, but point in the wrong direction as well. From March through June this year, the toxic combination represented 72.67 percent of the economy in constant dollar terms. That’s the highest level since the fourth quarter of 2017 (72.87 percent). Moreover, back then, the economy was growing a good deal faster (at a 3.50 versus a 2.02 percent annual rate).

None of this means that the U.S. economy is now firmly on an unhealthy growth track. In fact, the worrisome second quarter “growth contribution” figures followed an especially good first quarter. From January through March, personal consumption and housing together produced only 23.87 percent of that stretch’s solid 3.01 percent annualized real growth – the lowest such figure since the fourth quarter of 2011 (16.38 percent of 4.64 percent annualized growth).

On a standstill basis, the last time that the toxic combination represented a lower share of the total economy in real terms was the fourth quarter of 2015 (72.15 percent). And during that period, there was almost (0.13 percent) real annualized economic growth.

Further, the Trump healthy growth record so far is better than the record during President Obama’s two terms in office. During the latter’s administrations, the toxic combination generated 80.74 percent of its $2.2537 trillion in after-inflation growth. Under President Trump, personal consumption plus housing has been responsible for 72.64 percent of $1.002 trillion of such growth. (Both calculations begin the these two administrations in the second quarter of their first year in office, since Inauguration Day doesn’t take place until January 20.)

Real growth, moreover, has been somewhat faster so far. Over 32 quarters, the U.S. economy grew by 18.44 percent after inflation under Obama. Over nine Trump quarters, the economy has become 5.56 percent larger – which translates into 19.80 percent growth over a 32-quarter stretch. All in all, that’s a pretty good reflection on this President’s performance.

Economically, though, the big question is whether it will continue. And politically, it’s whether it will suffice, in tandem with any other perceived strengths, to bring a second Trump term.

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(What’s Left of) Our Economy: Healthier U.S. Growth is Continuing, at Least Trade-Wise

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

Since we’re clearly well into the 2020 presidential campaign, comparisons understandably have begun to be made by political and even economic types between President Trump’s economic record and that of his White House predecessor, Barack Obama.

In that vein, today’s new official U.S. figures on economic growth contain some good news for Mr. Trump, his supporters – and in fact for Americans collectively:  Even though they confirm that the nation’s growth this year is indeed slowing, and the trade deficit targeted for reduction by the President is going up, the latest numbers on the gross domestic product (GDP) also show that inflation-adjusted growth (the growth figure most closely followed) during the Trump years is still less closely associated with trade deficit increases than under Obama. In other words, by one important measure, the economy’s expansion is healthier – more of it is being generated by producing goods and services at home, instead of consuming imported goods and services.

The new numbers – which are the first of two sets of revisions for the second quarter of the year that will be released this year – don’t indicate progress at first glance. The real trade deficit, originally reported at $978.7 billion on an annualized basis, is now judged to have been $982.5 billion. That’s just a bit less than the record $983 billion figure that was hit in the fourth quarter of last year.

Moreover, total exports were revised down ($2.5205 trillion annualized to $2.5165 trillion annualized). Total imports were less than first reported as well, but only by a hair – $3.4990 trillion rather than $3.4992 trillion. And worse, quarter-to-quarter after-inflation total exports are now off by 1.48 percent, and after-inflation total imports are up 0.02 percent. Indeed, that real export fall-off was the biggest quarterly decrease since the depths of the last recession – when they cratered by 8.08 percent in the first quarter of 2009.

But despite this seeming backsliding, the Trump record has been much more impressive when examined in the context of economic growth. This conclusion emerges by examining how fast the economy has increased in constant dollar terms versus how fast the trade deficit has widened under the two administrations. Here are the calendar year annual rates of change for each, followed by the ratio between the two:

Obama years

                        real GDP       real trade deficit      deficit growth to GDP growth

09-10:          2.56 percent       16.73 percent                        6.54:1

10-11:          1.55 percent         0.39 percent                        0.25:1

11-12:          2.25 percent        -0.09 percent                      -0.04:1

12-13:          1.84 percent        -6.30 percent                      -3.42:1

13-14:         2.53 percent          8.33 percent                        3.29:1

14-15:         2.91 percent        25.02 percent                        8.60:1

15-16:         1.69 percent          8.61 percent                        5:09:1

Trump years

16-17:        2.37 percent          8.43 percent                        3.56:1

17-18:        2.93 percent          8.37 percent                        2.86:1

These tables show that only once during the Obama years (2013-14) did the economy grow at Trump-like rates while keeping real trade deficit growth within modest Trump-like ranges.  And although the that real trade deficit did shrink in absolute terms in two of the Obama years (2011-12 and 2012-13), economic growth during those two years were subpar. 

Moreover, the 2017-18 Trump results were distorted by major tariff front-running – the rush by importers to get their goods into the United States before announced tariffs raised their prices.

In addition, although 2019 isn’t yet finished, the Trump ratios so far look relatively good as well – especially for the first quarter.

                           real GDP     real trade deficit      deficit growth to GDP growth

4Q18-1Q19:    3.06 percent    -3.97 percent                        -1.30:1

1Q19-2Q19:    2.02 percent     4.07 percent                          2.01:1

The Trump record looks better still when presented on a rolling four quarters basis. This time the frame of reference will be a little different. We’ll focus on the high growth Obama period through the end of that administration, and compare it with the high growth Trump period through the present.

Obama years

                          real GDP        real trade deficit      deficit growth to GDP growth

1Q14-1Q15:   3.98 percent       26.68 percent                       6.70:1

2Q14-2Q15:   3.35 percent       21.34 percent                       6.37:1

3Q14-3Q15    2.44 percent       30.60 percent                     12.54:1

4Q14-4Q15:   1.90 percent       21.83 percent                     11.49:1

1Q15-1Q16:   1.62 percent       11.72 percent                       7.23:1

2Q15-2Q16:   1.34 percent         9.59 percent                      7.16:1

3Q15-3Q16:   1.56 percent         2.42 percent                      1.55:1

4Q15-4Q16:   2.03 percent       10.87 percent                      5.35:1

1Q16-1Q17:   2.10 percent         6.92 percent                      3.30:1

Trump years

4Q16-4Q17:   2.80 percent         5.90 percent                      2.11:1

1Q17-1Q18:   2.86 percent         6.34 percent                      2.22:1

2Q17-2Q18:   3.20 percent         0.06 percent                      0.19:1

3Q17-3Q18:   3.13 percent       15.44 percent                      4.93:1

4Q17-4Q18    2.52 percent       11.22 percent                      4.45:1

1Q18-1Q19:   2.65 percent         6.76 percent                     2.55:1

2Q18-2Q19:   2.28 percent       15.52 percent                     6.81:1

Again, under the Trump administration, the economy has managed to expand healthily in real terms while keeping the trade deficit’s increase under control much more often than under the Obama administration. Although the third and fourth quarter figures look like they undermine this case, in fact, they clearly demonstrate the impact of tariff front-running.  The only genuine fly in the Trump ointment so far: that final set of figures, when the price-adjusted trade deficit rose 6.81 times faster than the economy grew in those terms, while the rate of overall growth declined. And unfortunately, when it comes to analyzing these trends going forward, because of Mr. Trump’s new tariff announcements, front-running is likely to continue for the time being.

Even with this tariff front-running – and especially if the front-running doesn’t throw off the figures excessively – an economy growing faster relative to its trade deficit isn’t the sexiest economic achievement to brag about. But is it completely unreasonable to think that a supposed master-brander and pitchman like President Trump can’t rise to the challenge?

(What’s Left of) Our Economy: Those New GDP Numbers Keep Showing Healthier Trade-Related Growth Progress Under Trump

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

So much data were released yesterday morning on the U.S. economy’s growth rate – not only the initial read on the second quarter of this year, but revisions going back to 2014 – that it’s impossible to explore all the results and their implications in one post. As a result, I’ll focus today on the main messages being sent by how the tariff-centric Trump trade policies are affecting growth.

In a nutshell, the big takeaway for me was that, despite the sizable increase in the inflation-adjusted trade deficit in the second quarter of this year (to an annualized total of $978.70 billion – the second biggest ever, after the $983 billion mark hit in the fourth quarter of last year), the economy kept indicating that it can grow – and pretty strongly – without racking up big increases in trade gap. In other words, the United States is regaining the ability to expand at acceptable rates without getting deeper into hock. 

Still, there’s a major uncertainty hovering over these results: Signs continue that they’re being distorted by what’s called tariff front-running (accelerating purchases of imports in order to avoid announced or threatened duties), and the consequent effects on building and reducing business inventories. And since tariff threats hang over not only hundreds of billions of dollars of goods imports from China, but rhetorically anyway over automotive imports from all over the world, import and inventory levels could well remain volatile. Moreover, don’t forget the potential effect on exports: If President Trump carries through with tariff threats, foreign economies are likely to impose retaliatory levies on American goods, and curb these sales.

So far, though, so good.

As in recent reports on trade and the gross domestic product (or GDP – what economists define as “the economy”), this post will compare the economy’s growth rate with the growth rate of the trade deficit during two recent similar periods of time – the statistical year (e.g., four straight quarters) during which growth was fastest when former President Barack Obama was in office, and the statistical year during which growth has been fastest so far during President Trump’s administration.

Even with the latest revisions, the fastest statistical Obama growth year was between the second quarter of 2014 and the second quarter of 2015. Adjusted for inflation (the most closely followed GDP measure), the economy grew by 3.35 percent over those four quarters – just a little less than the 3.37 percent previously estimated. And during that period, the real trade deficit rose by 21.34 percent (a little more slowly than the 21.55 percent previously estimated).

Before today’s revisions, the fastest Trump era growth stretch took place between the first quarter of 2017 and the first quarter of 2018. But that 3.18 percent after inflation growth has now been downgraded all the way down to 2.65 percent. But growth between the second quarters of 2017 and 2018 has been revised up – to 3.20 percent. So there’s a new Trump growth champ.

But even though the Trump growth spurt has been only a little slower than its Obama counterpart, the story with the trade deficit was strikingly different. For during the Trump spurt, the gap widened by only 6.34 percent. That’s less than a third as fast as under Obama.

In other words, constant dollar growth under President Trump has taken place while piling up much less debt than similar growth during the Obama years. And growth that’s less reliant on debt is growth that’s a lot healthier and more sustainable.

Trump-era growth looks all the more sustainable upon realizing that during Mr. Trump’s administration so far, robust growth (at least by recent standards) has been much more self-reliant than during the Obama administration – at least until very recently. The table below shows the annual (calendar year, from fourth quarter to fourth quarter) real growth rates during the Obama and Trump presidencies starting in 2010 (the first full calendar yer of the current economic recovery); the growth rate of the after-inflation trade deficits, and the ratios between these two figures for each year:

Obama yrs          real GDP       real trade deficit      deficit growth to GDP growth

10-11:              1.61 percent       0.85 percent                         0.53:1

11-12:              1.47 percent      -0.92 percent                       -0.63:1

12-13:              2.61 percent     -8.89 percent                       -3.41:1

13-14:              2.88 percent    23.36 percent                        8.11:1

14-15:              1.90 percent    21.83 percent                      13.07:1

15-16:              2.03 percent    10.87 percent                       5:35:1

Trump years

16-17:             2.80 percent      5.90 percent                       2.11:1

17-18:             2.52 percent    11.22 percent                       4.45:1

The table shows that only once (between 2012 and 2013) did the Obama-era economy display any ability to grow faster than the humdrum rate of two percent with the trade deficit’s growth restrained. (In fact, it shrunk significantly.) Once growth accelerated (the following year), the trade shortfall exploded, and its rate of increase, along with those ratios, stayed high even as growth itself cooled notably.

Moreover, without pronounced tariff front-running, the 2017-18 Trump trade deficit figure and the resulting ratio both would likely have been much lower. And economic growth looks even more self-reliant, and therefore healthier, so far this year, as the follo  wing table shows:

                               real GDP      real trade deficit     deficit growth to GDP growth

4Q 18-1Q 19:       3.06 percent    -3.97 percent                       -1.30:1

1Q 19-2Q 19:       2.04 percent     3.68 percent                         1.80:1

The Trump record looks even better when presented on a rolling four quarters basis, starting with that peak Obama growth period between the second quarter of 2014 and the second quarter of 2015, and ending with the last such period – between the second quarter of 2018 and the second quarter of 2019:

                              real GDP      real trade deficit      deficit growth to GDP growth

2Q 14-2Q 15:    3.35 percent      21.34 percent                       6.37:1

3Q 14-3Q 15:    2.44 percent      30.60 percent                     12.54:1

4Q 14-4Q 15:    1.90 percent      21.83 percent                     11.49:1

1Q 15-1Q 16:    1.62 percent      11.72 percent                       7.23:1

2Q 15-2Q 16:    1.34 percent        9.59 percent                       7.16:1

3Q 15-3Q 16:    1.56 percent        2.42 percent                       1.55:1

4Q 15-4Q16:     2.03 percent     10.87 percent                        5.35:1

1Q 16-1Q 17:    2.10 percent       6.92 percent                        3.30:1

Trump

2Q 16-2Q 17:    2.16 percent    11.71 percent                        5.42:1

3Q 16-3Q 17:    2.42 percent      9.50 percent                       3.93:1

4Q 16-4Q 17:    2.80 percent     5.90 percent                        2.11:1

1Q 17-1Q 18:    2.86 percent     6.34 percent                       2.22:1

2Q 17-2Q 18:    3.20 percent     0.06 percent                       0.19:1

3Q 17-3Q 18:    3.13 percent   15.44 percent                      4.93:1

4Q 17-4Q 18:    2.52 percent   11.22 percent                      4.45:1

1Q 18-1Q 19:    2.65 percent     6.76 percent                      2.55:1

2Q 18-2Q 19:    2.29 percent   15.07 percent                      6.58:1

Though the figures fluctuate significantly, the difference under two different presidents at roughly the same phase of the same economic expansion is at least as significant. To start, the only time that annual real growth under Obama topped three percent during this stretch, the inflation-adjusted trade deficit soared 6.37 times faster. Under Trump, the economy has enjoyed two such periods. During the first, the real trade deficit barely budged. During the second, it rose 4.93 times faster than the economy.

During these Obama years, the after-inflation trade deficit’s annual growth rate slipped under ten percent three times. Real annual GDP growth never bested 2.10 percent during any of them. During the Trump years, sub-ten percent annual growth for the real trade deficit has occurred five times. Real annual GDP increased during those years at rates between 2.42 percent and 3.20 percent. The worst Obama ratio has been 12.54 percent. The worst Trump ratio has been 6.58 percent (coming during the most recent statistical year, and possibly indicating tariff front-running). 

Has President Trump managed to reduce the U.S. trade deficit as such, or made the U.S. economy, and especially strong growth, completely self-sufficient, and therefore free of debt dependence (in terms of parts of the economy where this is feasible, as opposed to, say, tropical fruit)? Of course not. The nearly $20 trillion American economy is obviously a supertanker that isn’t turned around easily or quickly. But it’s clear that whereas the United States was moving ever further from those goals before Mr. Trump was inaugurated, it’s now moving closer. Just as clear: If the President stays the course on tariffs (much less increase and/or broaden them), progress will likely continue.      

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

4Q 2018:               6.41 percent                   2.15 percent                  2.98:1

3Q 2018:             11.66 percent                   3.31 percent                  3.52:1

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

1Q 2018:              1.35 percent                    2.20 percent                 0.61:1

2018:                  12.74 percent                    2.86 percent                 4.45:1

2017:                    6.75 percent                    2.22 percent                 3.04:1

2016:                    2.66 percent                    1.57 percent                 1.69:1

2015:                  22.63 percent                    2.88 percent                 7.86:1

2014:                  15.88 percent                    2.45 percent                 6.48:1

2013:                    6.15 percent                    1.84 percent                 3.34:1

2012:                 10.23 percent                     2.25 percent                 4.57:1

2011:                 11.92 percent                     1.55 percent                 7.69:1

2010:                30.71 percent                      2.56 percent              12.00:1

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

2010: 11.42 percent

2011: 12.22 percent

2012: 13.08 percent

2013: 13.37 percent

2014: 13.95 percent

2015: 13.80 percent

2016: 13.65 percent

2017: 14.06 percent

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

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

1Q 18 14.48 percent

2Q 18 14.64 percent

3Q 18 14.61 percent

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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