The most reasonable conclusion to draw from today’s new U.S. trade figures (which cover February) is that, although evidence keeps growing that President Trump’s trade policies are returning to a success track, even only a fairly clearcut verdict won’t be possible until the March numbers come in.
The reason? By then, we’ll get at least the preliminary official read on the gross domestic product (GDP) for the first quarter of this year, and that will enable some significant light to be shed on a crucial (but almost completely ignored) measure of the Trump trade record – whether on his watch so far, the economy has been able to break or at least change the relationship between the growth of various measures of the trade deficit on the one hand, and overall economic growth on the other.
The answer matters because most economists have long insisted that an expanding economy and an improving trade balance almost never coexist. That claim is belied by the data, but the belief persists.
Further, good growth accompanied by better trade numbers would be of much more than academic interest. For the weaker the relationship between the worsening of the trade deficit and the growth of the economy, the more American growth would be stemming from domestic production, rather than domestic spending and borrowing, and vice versa.
As of the middle of last year, the economy had shown signs of notable progress along these lines. But in the last few months, as serious Trump tariffs on metals and especially on goods from China came on stream, the data started being distorted by front-running – i.e., importers rushing to procure affected goods before the levies kicked in and their prices rose.
Last month’s trade statistics contained important signs that these effects were ebbing, and the trend continued this month. (A second distortion, however, is influencing these results – the China business slowdown that takes place each year with the arrival of the spring holiday.) All the same, January’s initially reported 14.61 percent monthly drop in the total trade gap (the biggest such decrease since March) was followed by a 3.43 percent decline in February (and from a January level that was revised down slightly). And at $49.38 billion, the overall trade shortfall was the smallest for a single month since last July’s $51.44 billion.
Meanwhile, the total two-month fall-off in the total trade gap (17.56 percent) was the biggest such decrease since March-May, 2015 (20.50 percent). And this is where we come to the main unknown: How do these instances of trade deficit shrinkage compare with the economy’s overall performance? Although Washington doesn’t track GDP on a monthly basis, it’s worth noting that from the second quarter of 2015 to the third quarter (the period roughly corresponding with that earlier trade deficit narrowing, growth on a pre-inflation annualized basis was 1.40 percent.
What about such growth during the first part of this year? That’s the figure we’ll need to wait for until later this month. At the same time, even then, an even more important question will remain unanswered for a while longer: Can the combination of an improved trade performance and continued growth last? In 2015, it was short-lived. Indeed, the current dollar U.S. economic growth rate in full-year, 2016 (2.44 percent) was less than half of the full-year, 2015 pace (5.07 percent). Unfortunately, the durability of this trend won’t be known for many more months at a minimum.
Nonetheless, there’s an even more rigorous test that the Trump trade policies need to pass – whether they can manage to maintain healthy overall economic growth while encourage a reduction in that portion of the U.S. trade deficit that’s strongly influenced by trade policy decisions in the first place. As known by RealityChek regulars, that Made in Washington trade deficit strips out oil (because it’s almost never the subject of trade policymaking) and services (because trade liberalization of that activity remains in its infancy). On this front, signs of Trump trade progress haven’t shown up yet.
From January-February, 2017 (a period during which the Trump presidency began) to January-February, 2018, this Made in Washington deficit rose at the considerable pace of 18.47 percent. On the imperfect first-quarter-to-first-quarter basis, pre-inflation GDP was up 4.58 percent. That ratio was actually worse than during former President Barack Obama’s last year in office. Then, GDP expanded by 4.09 percent but the Made in Washington deficit actually dipped – by 0.50 percent.
As with the overall trade deficit, the Obama years sometimes witnessed strong economic growth during which the Made in Washington trade deficit worsened only moderately. For example, between the first quarters of 2011 and 2012, current dollar GDP improved by 4.80 percent and the Made in Washington trade deficit only widened by 9.80 percent. But growth slowed sharply thereafter. The January-February, 2009 to January-February, 2010 period was another time of Made in Washington trade shortfall shrinkage – by 3.13 percent. But GDP climbed by only a weak 2.27 percent.
Between January-February 2018 and January-February 2019, the Made in Washington deficit was up by a modest 2.48 percent. Can respectable growth be maintained? Tune in.
In the meantime, legitimate encouragement from the February trade figures can be drawn from the nature of the improvement. Sequential combined goods and services import growth was just 0.23 percent, while exports rose 1.13 percent – nearly five times faster.
On month, the Made in Washington deficit shrunk by 1.96 percent. That improvement combined with its 10.01 percent sequential drop in January made for the biggest such two-month decrease (11.86 percent) since that March-May period of 2015 (13.36 percent).
Good news came on the China trade front as well. February saw the biggest month-to-month reduction in the chronic, immense U.S. goods deficit with the People’s Republic (28.17 percent) since February, 2017 (36.04 percent). In addition, the resulting two-month decline in this trade gap (32.77 percent) was the biggest such figure since January-March, 2013 (36.16 percent) and the second biggest going all the way back to October-December, 2001 (39.87 percent).
An 18.21 percent surge in American merchandise exports helped (especially since it followed a 22.31 percent monthly plunge). But the 20.21 percent monthly falloff in the much greater amount of goods imports was the biggest contributor – and represented the biggest such decrease since February, 2017 as well, not to mention the second biggest since recessionary February, 2009 (23.84 percent).
February’s manufacturing trade performance was excellent as well – relatively speaking, of course, since the deficit remains enormous in absolute terms (topping $1 trillion last year).
But industry’s trade gap plummeted by 20.02 percent on month in February, as exports rose 1.85 percent and imports sank by 9.14 percent. And the gap shows signs of stabilizing on a year-on-year basis as well, as it’s up a mere 0.37 percent during the first two months of this year compared with the first two months of 2018.