March 25, 2023


Equality opinion

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

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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!