Trade Deficit Undermines Economic Recovery

“Spectacularly terrible” – that’s how Ian Shepherdson of High Frequency Economics described the surprising trade deficit numbers released yesterday by the Census Bureau. Bloomberg’s survey of 73 economists predicted that the trade deficit would fall by $0.2 billion, but the deficit actually rose by $7.9 billion – 18.8 percent. The trade deficit is now the highest it has been since October 2008.

The very unusual part of the data report is that exports declined by $2.0 billion in June from May exports of $152.4 billion. Yes, we know that the (anemic) U.S. economic recovery is stimulating consumer demand for foreign goods, so we’ll see rising imports, but the decline in exports is very worrisome.

The unexpected widening of the trade deficit was not included in the second quarter advance GDP estimates released by the Bureau of Economic Analysis (BEA) late last month, which showed the economy growing at a 2.4 percent annualized rate, but the data available at the time of the release indicated that imports were a major drag on the GDP:

The deceleration in real GDP in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment…

The advance BEA estimate of second quarter GDP growth of 2.4 percent was based on trade deficit projections that were $4 billion less than the numbers that have just been released. The Wall Street Journal reports on the implications of this discrepancy:

“The wider-than-expected trade gap in itself points to a 0.4 percentage point downward revision to GDP growth, which needs to be added to the 0.8 percentage point estimated downward revision coming from construction and inventories. Added together, these revisions at this point suggest second-quarter real GDP growth will barely be above 1% (call it 1.1%–1.2%),” said John Ryding and Conrad DeQuadros at RDQ Economics.

Wall Street types were so concerned with the prospect of the widening trade deficit stunting the economic recovery that the Dow lost 2 percent of its value once markets opened yesterday morning to the news.

The trade numbers are yet another reminder that the status quo trade policy is broken.  NAFTA-style trade deals are only leading to larger and larger trade deficits: trade with our 17 FTA partners contributed $1.4 billion to the rise in the goods trade deficit in June.  Luckily, 145 members of Congress have cosponsored the TRADE Act, which establishes negotiating objectives for trade pacts that would ensure strong export growth and would prevent the offshoring of jobs associated with high trade deficits.