Global Economics

Why a Wider Trade Deficit Suggests a Stronger U.S. Consumer


Cargo ships in New York Harbor

Photograph by Spencer Platt/Getty Images

Cargo ships in New York Harbor

U.S. consumers are getting more confident by the month. The Conference Board’s consumer confidence index jumped from 84.6 to 90.9 in July, the highest it’s been since October 2007, two months before the economy officially went into recession. That marks the first time the measure has surpassed pre-recession levels during the current recovery. And it took only six years.

This has certainly been a slow-burn recovery. The lack of consistent growth may end up extending the recovery for a few more years—long, slow growth as opposed to a period of frothier activity that might spur some bubbles. On the other hand, the sluggish economy has left a lot of growth on the table and has permanently damaged the potential U.S. growth rate over the next decade. So that’s bad.

Consumers are more confident than they've been since 2007BloombergConsumers are more confident than they've been since 2007

But even after turning negative during the first quarter, it seems as if the U.S. economy may finally be on the cusp of stringing together a couple of quarters of growth above 3 percent. The average forecast of economists surveyed by Bloomberg is for the economy to grow by 3.1 percent in the second quarter. Recent job growth certainly underpins that estimate.

A further reason to think the economy is on better footing is the widening trade deficit. That might seem a silly thing to say because the wider the trade deficit, the more it eats into gross domestic product. But that’s one of the strange aspects of how GDP is calculated: A rise in imports, although suggestive of a stronger U.S. consumer, subtracts from GDP growth. During the first quarter, for example, imports stole .29 percentage points from GDP growth.

A widening trade deficit suggests a strengthening U.S. consumerCapital EconomicsA widening trade deficit suggests a strengthening U.S. consumer

Though it seems a bad thing, a widening trade deficit is usually associated with a growing economy. From 1994 to 2000, the trade deficit went from $6 billion to $33 billion as rising imports subtracted an average of 1.26 percentage points from GDP growth every quarter. At the same time, quarterly GDP growth averaged 4 percent.

In a note to clients on Tuesday morning, Capital Economics chief U.S. economist Paul Ashworth touched on this point. Though the trade deficit has widened recently, the “increase is largely due to the strength of imports rather than the weakness of exports,” he wrote. While Ashworth calculated that exports have risen at a “very healthy double-digit” pace in the second quarter, “imports are expanding at an even faster pace. With the value of the dollar largely unchanged over the past 12 months, the strength of imports “reflects a surge in domestic demand, which is actually an encouraging development,” wrote Ashworth.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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