On Thursday, I pointed out that looking at how the nation’s economy is structured – the components of the government’s quarterly reports on the gross domestic product – is a good way to figure out whether America is moving closer to or farther from President Obama’s vitally necessary goal of creating “an economy built to last.” Below is another good way to measure progress toward genuine U.S. economic healing – comparing the growth of the overall U.S. economy with the growth of the U.S. trade deficit.
To my surprise, the message sent by those numbers is even more discouraging than that sent by examining how much of the economy is still comprised of personal consumption and housing – the toxic combination whose bloated growth triggered the last decade’s disastrous credit bubble. In fact, it’s downright shocking. Not only does the U.S. economy remain far from “built to last” status. By this measure, it’s becoming an even shakier house of cards.
As the President has explained, creating an economy built to last requires changing the country’s growth strategy from one based on borrowing and spending to one based on saving, investing, and producing. If the U.S. trade deficit is shrinking, that’s a sign that the nation is reducing its reliance on debt-fueled growth. Ditto for a trade deficit growing more slowly than the economy as a whole. By contrast, if the trade gap is growing, and especially growing faster than the economy overall, that reveals that too much of the growth remains debt-dependent – and that it’s consequently unsustainable.
I wasn’t completely surprised to see that, during the current economic recovery, the trade deficit has been expanding much faster than economic growth. Since the rebound officially began, in the second quarter of 2009, the gross domestic product after inflation is up 11.36 percent. But the real trade deficit has increased more than twice as quickly – by 28.39 percent. Moreover, the problem is considerably worse than these figures suggest, since they mask a dramatic improvement in U.S. trade in energy products.
What completely stunned me, though, was finding out that, according to this methodology, the current economic expansion is even more debt-dependent than the bubble decade’s expansion. That 2000s expansion lasted six years, from the fourth quarter of 2001 to the fourth quarter of 2007, and during this period, the economy grew by 18 percent accounting for inflation. Yet the real trade deficit grew only a bit faster – by 19.32 percent. Worse, this trade deficit growth preceded the energy revolution that began in this decade. And the current recovery is only five years old.
Optimists can point to the severity of the Great Recession (which was much deeper than the early 2000s slump) as one important reason for the trade deficit’s strong recent rebound. Further, trade flows globally were hit especially hard during the crisis and its aftermath. But the trade balance’s rapid deterioration despite the rapidly shrinking oil trade deficit in particular trumps that observation.
The $470.3 billion real trade deficit run up in the second quarter of this year is still well below its peak of $819.7 billion in the third quarter of 2006. But overall growth is much slower these days, too (the preliminary four percent annualized level in the second quarter notwithstanding). Until the gross domestic product starts outpacing the trade shortfall in growth, America will remain hooked on living beyond its means – and it will be more accurate to describe its economy as built not to last, but to implode.