Trade Deficit Down — Economic Growth Up
Kurt Brouwer November 9th, 2007
For many years, the so-called trade deficit has held back economic growth. Now, that may be changing as this post from the Wall Street Journal reports [emphasis added]:
Good News and Bad On Trade (WSJ Real-Time Economics Blog, November 9, 2007, Greg Ip)
‘The goods news is trade is making a major contribution to economic growth. September’s trade deficit came in far lower than economists expected and August’s was revised down. The real (inflation-adjusted) trade deficit in goods was an annualized $36 billion less in the third quarter than in the second. Economists now think third quarter GDP growth could be revised up from 3.9%, annualized, to as high as 5.3% (according to Morgan Stanley). “For the first time in many years, the trade sector has been a positive contribution to U.S. growth, as opposed to a negative contribution,” Fed Chairman Ben Bernanke said Thursday. “And I think, going forward, we’ll see additional strength coming from foreign trade.”…
This is unalloyed good news. Exports are growing and the imbalance in trade is decreasing. One reason our exports have done well is that the dollar has been falling for several years. For more, see How Far Has the Dollar Fallen? And Why?
The bad news referenced in the post is that there are some indications that higher prices on foreign goods and services may lead to inflationary pressures here:
‘…The bad news is that trade is also contributing to inflation. Import prices jumped 1.8% in October from September and are up 9.6% from the previous year. To be sure, most of that was due to rising oil and natural-gas prices. But even excluding fuels, prices were 0.3% higher from September and up 2.4% from a year earlier. Prices for imports from China jumped 0.3%, the sixth consecutive month of increase, and are up 2.2% in the last 12 months. “During this time, the Chinese currency has appreciated by 5.3%,” notes Drew Matus of Lehman Brothers. “This data highlights why the possibility of a dollar depreciation-led import price pass-through remains a concern for the Fed despite models suggesting that no pass-through exists.” Mr. Bernanke said yesterday: “Oil prices and the declining dollar… may have some effect on import prices. Those are risks that we cannot ignore.”
As the dollar falls, foreign goods and services may increase in price. So far, such increases have been muted because companies are under competitive pressure to hold down price increases. Nonetheless, this could impact our inflation in the future and it bears watching.
This MarketWatch article spells out more on how much the trade deficit has fallen [emphasis added]:
U.S. Trade Gap Shrinks To 2-Year Low (MarketWatch, November 9, 2007, Rex Nutting)
‘A surge in exports in September helped push the U.S. trade deficit down to $56.5 billion, the lowest in more than two years, the Commerce Department reported Friday.
U.S. exports rose 1.1% to a record $140.1 billion on record shipments of capital goods, industrial materials and foods.
Boosted by record imports of capital goods and an increase in the value of petroleum shipments, imports into the United States increased 0.6% to $196.6 billion, the second highest ever.
The weaker U.S. dollar has been boosting exports, especially in the past three months. U.S. farmers and producers of other commodities are benefiting from higher prices and a weaker dollar.
At the same time, imports have slowed because of sagging growth in the United States and because imports are relatively more expensive.
Compared with a year ago, the trade deficit has fallen by about 14%, with exports up 14% and imports rising 4.9%. The figures are not adjusted for price changes…’
There is plenty of anxiety and angst about the falling dollar, but so far it is working out pretty well in terms of reducing our trade deficit. There are winners and losers in terms of the dollar’s weakness, but it should be clear that the dollar’s decline has not been all bad. In fact, as these articles point out, it has been helpful in terms of trade issues.
I do not know how much this improvement in our trade balance might boost overall economic growth, but it is likely to be significant. This is also an example of resilient our economy is. When one sector of the economy such as housing or financial services falters, we often see another sector picking up the slack.
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