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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: A Deeper U.S. Contraction and a Bigger Trade Bite

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

This morning Americans and the rest of the world found out that the U.S. government now believes that the American economy shrank a little more during the first quarter of this year than first estimated. And the details show that the nation’s towering and still-soaring trade deficit was a major culprit.

According to today’s release from the Commerce Department, the combined goods and services trade gap for the quarter totaled $1.5435 trillion at annual rates adjusted for inflation. That new record total – the seventh straight such all-time high – was 0.12 percent greater than the $1.5417 trillion dollar gap reported by Commerce in its first look at the changing size of the economy (termed the gross domestic product, or GDP).

And accompanying this finding was the news that the first quarter’s inflation-adjusted contraction was 1.52 percent at annual rates – not the 1.42 percent previously reported. So last month’s thoroughly depressing picture of an economy shrinking as its trade deficit surges (which last occurred in the first quarter of 2020) became slightly grimmer.

The swelling trade deficit reduced first quarter real GDP by 3.23 percentage points – more than the 3.20 percentage point subtraction estimated in the initial first quarter GDP report. For good measure, this growth loss was the worst in absolute terms since the 3.25 percentage point hit suffered during the third quarter of 2020 – when the economy roared back from the short but deep CCPVirus-induced downturn earlier that spring.

Yet that lost growth figure was dwarfed by the actual expansion that occurred (an a blazing 30.19 percent annualized in real terms). The trade deficit’s impact on the first quarter of this year helped turn slow growth into shrinkage. Specifically, had the already astronomical trade shortfall simply not gotten worse between the fourth quarter of last year and this year’s first quarter, the economy would have expanded by 1.71 percent

Worse, the growth toll exacted by the ballooning trade deficit in relative terms reached a new record. The 3.23 percentage point drag on an economy that shriveled by a total of 1.52 percent was slightly bigger than the 3.22 percent drag on the 1.53 percent total contraction recorded in the second quarter of 1982 – the previous all-time high.

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

Because the real trade deficit during the first quarter was rising faster than first thought even as the overall economy was shrinking faster, the gap’s share of real GDP set a new record, too – 7.82 percent, compared with the 7.81 percent calculable from last month’s initial first quarter numbers. And the increase in this figure over its fourth quarter counterpart was a full percentage point.

In line with that latter result, the latest first quarter trade deficit figure now exceeds the fourth quarter level by 14.32 percent, not the 14.19 percent calculable from last month’s GDP release. That sequential increase remained 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 getting smaller.

And all told, the after-inflation trade deficit is now up 82.10 percent since the fourth quarter of 2019, the last quarter before the CCP Virus’ arrival began seriously affecting and especially distorting the economy.

The first quarter U.S. constant dollar goods trade deficit actually came in fractionally smaller in this morning’s government release than reported last month – $1.6680 trillion at annual rates versus $1.6685 trillion. Still a seventh straight record, this total now tops that of the fourth quarter by 13.61 percent, not the 13.65 percent calculable last month. Nonetheless, that increase remained the biggest since the 20.40 percent surge between that second and third quarter of 2020. And since that last pre-pandemic fourth quarter of 2019, the goods trade deficit has swelled by 55.58 percent.

By contrast, the new estimate shows that the chronic U.S. services trade surplus reached only $119 billion – 1.57 percent lower than the initially reported $120.9 billion. This new figure produced the first sequential decline in this surplus since the second quarter of 2021. Since the fourth quarter of 2019, this surplus has been cut nearly in half – by 47.51 percent, to be precise – as the virus has hit global activity in this sector unusually hard.

As for total inflation-adjusted exports, they’re now judged to be 0.14 percent higher in the first quarter than initially reported – $2.3577 trillion annualized versus $2.3545 trillion. But they’re still 1.38 percent lower than in the fourth quarter, and the sequential decrease remained the fourth in the nine quarters since that first pandemic-affected quarter – the first quarter of 2020. Moreover, in real terms, combined goods and services exports are still off by 7.66 percent since pre-pandemic-y fourth quarter, 2019.

Total inflation-adjusted first quarter imports are also now estimated as higher than initially reported (by 0.13 percent). Therefore, the $3.9012 trillion annual level still represents the fifth consecutive quarterly record. Meanwhile, the new 4.29 percent quarterly increase was the biggest since the 7.04 percent recorded between the third and fourth quarters of 2020 – when the economy was growing. As a result, total real imports are now 14.71 percent greater than in the fourth quarter of 2019.

After-inflation goods exports of $1.7519 trillion were slightly (0.12 percent) higher in the first quarter than previously reported, but still down 2.29 percent from the fourth quarter level. That decrease, moreover, was still the biggest since the 23.08 percent nosedive between the first and second quarters of 2020 – when the CCP Virus-induced downturn hit. And they, too, have fallen on a quarterly basis for four of the nine quarters that have passed since the pandemic first arrived in force in early 2020. In all, goods exports are now 1.72 percent lower than their immediate pre-pandemic levels.

Price-adjusted goods imports were also slightly (0.09 percent) higher in the first quarter than initially reported. The $3.4199 trillion annualized total was still the second straight all-time high and the second straight increase, and the 4.87 percent quarterly rate of increase still the fastest since the 6.80 percent rise in the fourth quarter of 2020. These overseas purchases have now increased by 19.83 percent since that final pre-pandemic fourth quarter of 2019.

Real services exports, however, were 0.05 percent weaker in the first quarter than initially judged – $633.3 billion at annual rates as opposed to $633.6 billion. Even so, that total climbed for the second quarter in a row (by 0.89 percent), and represented the best level since the $695.3 billion annualized recorded for the first quarter of 2020. All the same, and again, reflecting the outsized CCP Virus blows taken by the sector, constant dollar services exports have fallen by 18.15 percent since the last pre-pandemc quarter.

Yet price-adjusted services imports were revised up by a significant 0.31 percent during the first quarter, and the $514.3 bi1lion annualized level was 1.32 percent higher than the fourth quarter total and represented the strongest real services import total since the $547 billion annualized figure for the fourth quarter of 2019.

These new overall GDP numbers confirm that the U.S. economy’s growth has been slowing markedly (as does this usually pretty on-target forecast for the second quarter). But with one possible exception, all the forces and developments cited in my trade and GDP post last month pointing to continued increases in the inflation-adjusted U.S. trade deficit remain in place, ranging from the strong dollar, the Federal Reserve’s stated determination to reduce growth in order to fight inflation, and continued economic troubles in major U.S. trade partners like the European Union and China – which, along with the robust greenback, figures to curb American exports.

The possible exception – recent stock market declines start to crimp American consumer spending in a reversal of the wealth effect. But even if such caution appears, purchases of imports would need to fall much faster than buys of domestically produced goods and services in order even to retard the trade deficit’s surge, and this kind of favorable outcome for the economy is hardly a guarantee.

(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!