A Reversal of the Shrinking Trade Deficit Is Drag on Real GDP Growth

In my last blog for the New York Times, I reviewed the effect of our trade balance on GDP. We've had a deficit (imports>exports) for several years, which is a net minus, or drag, on GDP. However, in recent quarters, in part because of the decline in the dollar until lately, the deficit has shrunk, exerting a positive influence on the change in GDP. (A minus times a minus equals a plus.) In some quarters, including the 2^nd and 3^rd of 2008, the positive change in the trade balance has been greater than the change in GDP itself.

The impetus to GDP was much stronger in the 2^nd quarter than in the 3^rd quarter, when the preliminary estimate of the change in Real GDP was -0.5 percent. Had the trade balance contributed as much in the 3^rd quarter as in the 2^nd, the number for Real GDP would have been positive.

The lesser contribution of our foreign trade to Real GDP was due at least in part to the recent appreciation of the dollar that is probably a "flight to quality phenomenon." I wondered if the change from the 2^nd to the 3^rd quarter might be the beginning of a trend. Today, we received some support for that conclusion in the release of the trade data for October, which showed the deficit increasing to $57.2 from a revised 56.6 for September.

This is not a terribly large change, but it is unfortunate since net exports had been about the only private sector source of strength recently.  Consumption declined in the 3^rd quarter, investment spending was about flat, and net exports made a (diminished) positive contribution. It looks like government fiscal policy will be the only source of strength in the coming months and quarters. The recession promises to be not only longer, but deeper than the last couple. It would be helpful if dollar appreciation paused and resumed later when the economy is in better shape to handle it.