(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: 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: More Trade Normality Revealed in New GDP Figures – But for How Long?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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