So much data were released yesterday morning on the U.S. economy’s growth rate – not only the initial read on the second quarter of this year, but revisions going back to 2014 – that it’s impossible to explore all the results and their implications in one post. As a result, I’ll focus today on the main messages being sent by how the tariff-centric Trump trade policies are affecting growth.
In a nutshell, the big takeaway for me was that, despite the sizable increase in the inflation-adjusted trade deficit in the second quarter of this year (to an annualized total of $978.70 billion – the second biggest ever, after the $983 billion mark hit in the fourth quarter of last year), the economy kept indicating that it can grow – and pretty strongly – without racking up big increases in trade gap. In other words, the United States is regaining the ability to expand at acceptable rates without getting deeper into hock.
Still, there’s a major uncertainty hovering over these results: Signs continue that they’re being distorted by what’s called tariff front-running (accelerating purchases of imports in order to avoid announced or threatened duties), and the consequent effects on building and reducing business inventories. And since tariff threats hang over not only hundreds of billions of dollars of goods imports from China, but rhetorically anyway over automotive imports from all over the world, import and inventory levels could well remain volatile. Moreover, don’t forget the potential effect on exports: If President Trump carries through with tariff threats, foreign economies are likely to impose retaliatory levies on American goods, and curb these sales.
So far, though, so good.
As in recent reports on trade and the gross domestic product (or GDP – what economists define as “the economy”), this post will compare the economy’s growth rate with the growth rate of the trade deficit during two recent similar periods of time – the statistical year (e.g., four straight quarters) during which growth was fastest when former President Barack Obama was in office, and the statistical year during which growth has been fastest so far during President Trump’s administration.
Even with the latest revisions, the fastest statistical Obama growth year was between the second quarter of 2014 and the second quarter of 2015. Adjusted for inflation (the most closely followed GDP measure), the economy grew by 3.35 percent over those four quarters – just a little less than the 3.37 percent previously estimated. And during that period, the real trade deficit rose by 21.34 percent (a little more slowly than the 21.55 percent previously estimated).
Before today’s revisions, the fastest Trump era growth stretch took place between the first quarter of 2017 and the first quarter of 2018. But that 3.18 percent after inflation growth has now been downgraded all the way down to 2.65 percent. But growth between the second quarters of 2017 and 2018 has been revised up – to 3.20 percent. So there’s a new Trump growth champ.
But even though the Trump growth spurt has been only a little slower than its Obama counterpart, the story with the trade deficit was strikingly different. For during the Trump spurt, the gap widened by only 6.34 percent. That’s less than a third as fast as under Obama.
In other words, constant dollar growth under President Trump has taken place while piling up much less debt than similar growth during the Obama years. And growth that’s less reliant on debt is growth that’s a lot healthier and more sustainable.
Trump-era growth looks all the more sustainable upon realizing that during Mr. Trump’s administration so far, robust growth (at least by recent standards) has been much more self-reliant than during the Obama administration – at least until very recently. The table below shows the annual (calendar year, from fourth quarter to fourth quarter) real growth rates during the Obama and Trump presidencies starting in 2010 (the first full calendar yer of the current economic recovery); the growth rate of the after-inflation trade deficits, and the ratios between these two figures for each year:
Obama yrs real GDP real trade deficit deficit growth to GDP growth
10-11: 1.61 percent 0.85 percent 0.53:1
11-12: 1.47 percent -0.92 percent -0.63:1
12-13: 2.61 percent -8.89 percent -3.41:1
13-14: 2.88 percent 23.36 percent 8.11:1
14-15: 1.90 percent 21.83 percent 13.07:1
15-16: 2.03 percent 10.87 percent 5:35:1
16-17: 2.80 percent 5.90 percent 2.11:1
17-18: 2.52 percent 11.22 percent 4.45:1
The table shows that only once (between 2012 and 2013) did the Obama-era economy display any ability to grow faster than the humdrum rate of two percent with the trade deficit’s growth restrained. (In fact, it shrunk significantly.) Once growth accelerated (the following year), the trade shortfall exploded, and its rate of increase, along with those ratios, stayed high even as growth itself cooled notably.
Moreover, without pronounced tariff front-running, the 2017-18 Trump trade deficit figure and the resulting ratio both would likely have been much lower. And economic growth looks even more self-reliant, and therefore healthier, so far this year, as the follo wing table shows:
real GDP real trade deficit deficit growth to GDP growth
4Q 18-1Q 19: 3.06 percent -3.97 percent -1.30:1
1Q 19-2Q 19: 2.04 percent 3.68 percent 1.80:1
The Trump record looks even better when presented on a rolling four quarters basis, starting with that peak Obama growth period between the second quarter of 2014 and the second quarter of 2015, and ending with the last such period – between the second quarter of 2018 and the second quarter of 2019:
real GDP real trade deficit deficit growth to GDP growth
2Q 14-2Q 15: 3.35 percent 21.34 percent 6.37:1
3Q 14-3Q 15: 2.44 percent 30.60 percent 12.54:1
4Q 14-4Q 15: 1.90 percent 21.83 percent 11.49:1
1Q 15-1Q 16: 1.62 percent 11.72 percent 7.23:1
2Q 15-2Q 16: 1.34 percent 9.59 percent 7.16:1
3Q 15-3Q 16: 1.56 percent 2.42 percent 1.55:1
4Q 15-4Q16: 2.03 percent 10.87 percent 5.35:1
1Q 16-1Q 17: 2.10 percent 6.92 percent 3.30:1
2Q 16-2Q 17: 2.16 percent 11.71 percent 5.42:1
3Q 16-3Q 17: 2.42 percent 9.50 percent 3.93:1
4Q 16-4Q 17: 2.80 percent 5.90 percent 2.11:1
1Q 17-1Q 18: 2.86 percent 6.34 percent 2.22:1
2Q 17-2Q 18: 3.20 percent 0.06 percent 0.19:1
3Q 17-3Q 18: 3.13 percent 15.44 percent 4.93:1
4Q 17-4Q 18: 2.52 percent 11.22 percent 4.45:1
1Q 18-1Q 19: 2.65 percent 6.76 percent 2.55:1
2Q 18-2Q 19: 2.29 percent 15.07 percent 6.58:1
Though the figures fluctuate significantly, the difference under two different presidents at roughly the same phase of the same economic expansion is at least as significant. To start, the only time that annual real growth under Obama topped three percent during this stretch, the inflation-adjusted trade deficit soared 6.37 times faster. Under Trump, the economy has enjoyed two such periods. During the first, the real trade deficit barely budged. During the second, it rose 4.93 times faster than the economy.
During these Obama years, the after-inflation trade deficit’s annual growth rate slipped under ten percent three times. Real annual GDP growth never bested 2.10 percent during any of them. During the Trump years, sub-ten percent annual growth for the real trade deficit has occurred five times. Real annual GDP increased during those years at rates between 2.42 percent and 3.20 percent. The worst Obama ratio has been 12.54 percent. The worst Trump ratio has been 6.58 percent (coming during the most recent statistical year, and possibly indicating tariff front-running).
Has President Trump managed to reduce the U.S. trade deficit as such, or made the U.S. economy, and especially strong growth, completely self-sufficient, and therefore free of debt dependence (in terms of parts of the economy where this is feasible, as opposed to, say, tropical fruit)? Of course not. The nearly $20 trillion American economy is obviously a supertanker that isn’t turned around easily or quickly. But it’s clear that whereas the United States was moving ever further from those goals before Mr. Trump was inaugurated, it’s now moving closer. Just as clear: If the President stays the course on tariffs (much less increase and/or broaden them), progress will likely continue.