Will Trade Lead Us Out of Recession?
Consider the following chart from the Census Bureau:
Notice that one benefit of the recession have been a declining trade deficit. This chart better shows the decline:
From the Wall Street Journal:
The trade gap decreased to $26 billion in May from April's $28.8 billion, the Commerce Department said Friday. Exports rose 1.6% in May to $123.3 billion on a seasonally adjusted basis. Imports fell 0.6% to $149.3 billion.
"It's a very good sign for GDP," says Paul Ashworth, senior U.S. economist for Capital Economics in Toronto. "The economy didn't shrink by much in the second quarter, and there's an outside chance it recorded a gain." Forecasting firm Macroeconomic Advisers increased its second-quarter GDP forecast from minus 1.6% to plus 0.2% on the news......
To be sure, the good news on the U.S. export front was tempered by the decline in imports, which underscores how American businesses and consumers spent gingerly on imported goods. That is bad news for overseas economies that rely on the U.S. market. And trade overall remains far below levels from before the financial crisis.
"Arithmetically this suggests trade is going to be a big positive boost, but largely as a result of imports falling at a rapid pace," says Ted Wieseman, economist at Morgan Stanley in New York. Because exports boost GDP and imports drag it down, the narrowing of the trade gap helps boost the overall growth figure. Exports accounted for 13% of GDP in 2008.
Trade is only 13% of GDP so it can't be the primary driver of growth (at least not yet). But suppose it grew just enough to pick up the slack from the drop in consumer spending that is coming (or at least helped to slow the decline in growth). According to the latest BEA data personal consumption expenditures totaled $9.9 trillion in the first quarter while exports totaled $1.724 trillion. That means a 1% drop in PCEs would need a slightly larger 1% growth in exports (along with a stabilizing or declining imports).
However, consider that information with this:
This new American economy, Summers hopes, will be "more export-oriented" and "less consumption-oriented"; "more environmentally oriented" and "less energy-production-oriented"; "more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented"; and, finally, "more middle-class-oriented" and "less oriented to income growth that is disproportionate towards a very small share of the population". Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift.
And also consider this. The US is going to issue a large amount of debt over the nest four years. As a result, the US dollar will probably continue its move lower leading to cheaper exports.
As the chart above shows, the dollar formed a double top over the last 9 months and has since been moving lower.
While I don't think this is a cure-all panacea, it is a very interesting proposition.
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I was under the impression that the entire USA GDP was in the range of 15 trillion.
If so then how can this be: "According to the latest BEA data personal consumption expenditures totaled $9.9 trillion in the first quarter " ?
It would seem to be difficult for personal expenditures to be roughly 40 trillion per year in a 15 trillion economy.
Did I misunderstandf?
+
DWR,
The BEA presents GDP data in both "annualized" quarterly and annual figures. GDP data is reported as quarterly figures in annualized terms (what the annual value or change would be if the quarter's pace of growth or contraction continued for a year). For instance, at the first quarter "rate" for PCE, 2009's total PCE would be $9.9T. Thus, it's erroneous to extrapolate this data to an annual figure through multiplication by any factor, especially a factor of four, as it is already "annualized".
Similarly, at the first quarter "rate" for GDP, 2009's total GDP is anticipated to be $14.097T (based on quarterly data), a decrease from 2008's total GDP.
Here's an easy rule of thumb to remember: 2/3rds of the US economy is consumer spending. Thus, PCE is approximately 2/3rds of GDP. Please note that 70% is often used as a rule of thumb as well. Hope this helped.
Yes, thank you.
Numbers and charts make for nice asthetics and are enough to lead the sheep but cloak escape the bigger, more relevant picture.
98% of Americans are either un or ore importantly, - *underemployed*. Shifting trade one way or another means squat in the working persons economy when the population can't get a living wage.
Neoliberal trade only feeds the addictive consumerism that has done more damage to our country than opium did to the Chinese. It has made us poisoned and has made us slaves.
Most Americans now could give a rats-ass how much is exported if they don't get to share in the prosperity. Besides, we can produce ANYTHING we need, - hopeless reliance on trade is a myth propagated by the already-haves who oppress and enslave us and lust for global corporate empire.
Reverse the obsene 30 year concentration of wealth, - that alone will actually make a difference to the long disenfranchised 98% of the country.
98% of all Americans are un- or under-educated. Since employment reflects education, there is a clear causality: let your own kids fail in school and they will fail in life.
Besides the urban poor, people are very educated in this country. The problem now is that there aren't enough jobs and that there doesn't appear to be much prospect of strong job growth in the future.
I think that there are several things that are depressing wages, not just rich people oppressing us, though its an important factor, regrettably. I'd say that's its really the 0.9% top that are responsible. People that make 500,000-1 mil a year are really rich but don't really have concentrated political and social power.
Making America a more export based economy will raise wages and ensure that wages increase in the future. We have to be making something technologically difficult to manufacture that the world wants or else we will be at the mercy of global competition in terms of our wages. If you don't make the best in the world, you won't be paid the best in the world.
Free trade enlarges the global economic pie, which equates to greater prosperity for everyone on net. Before WW2, the US was very isolated from the rest of the world economically. By the 1950s, Europe was incorporated into our economy, then Japan. Canada was intertwined with our economy as well. In the 1960s and 1970s South Korea and Taiwan joined us. In the early 90s Mexico and Eastern Europe. By 2000, the US was at the height of its prosperity - global investment was all flowing to the US, the dollar was extremely strong and over-valued, and Europe and Asia had bad economic times most the decade. In 2001 China was allowed entry into the WTO, and that is where the imbalances really began. We probably sacrificed too much manufacturing during our housing boom this decade. In 2006, 2007, and 2008, exports picked up dramatically, but it wasn't enough to off-set these imbalances. Half the trade deficit was oil, however. I think we need to focus on alternative energy over the next years to mitigate that problem. I'm not sure how to revive US manufacturing. Tariffs will result in a global economic collapse. Corporate tax cuts and taking health care off corporate balance sheets will help. The final defeat of the unions would also help.
With alll the negativity, it's no wonder the world is in trouble. Geesh! Lighten up and brighten up people! You're all like Cassanra's! It's NOT all doom and gloom!
"Will Trade Lead Us Out of Recession?"
Right after Moses leads us out of the desert...
Rule this is the data source you asked for!
Office of Comptroller of the Currency Quarterly Derivatives Report for June 2009!
http://www.occ.gov/ftp/release/2009-72a.pdf
It is on page 23!
Thank you so much! Yep, it sure looks like green shoots to me--must be the wacky weed I've heard so much about!
Last time I checked, trade was a negative 7% of GDP, meaning our importing actually decreases GDP. Unfortunately for your theory (like all your others), until exports exceed imports it won't be a net benefit for the US. A small drop in imports doesn't signify that recovery is coming; it says the debt burden is too high and people aren't buying as much anymore.
The double dip of the dollar index is pretty self-explanatory. I'm glad you didn't try to mess that one up.
"The double dip of the dollar index is pretty self-explanatory. I'm glad you didn't try to mess that one up."
LOL
GDP growth won't be determined by how much the trade balance is as a percentage of GDP. All that matters for GDP is the growth/drop in exports relative to the growth/drop in imports. So if exports grow more than imports for now on, then trade will add to GDP. If exports remain the same and imports drop, then trade will add to GDP. If exports and imports grow or drop the same, then it will have no effect on GDP. Note that early this decade and in the late 90s, imports grew substantially more than exports and thus trade was a drag on GDP. Trade added to GDP in 2007 and 2008 for most quarters. Trade also added to GDP in the late 80s from increased exports and in the really early 90s because of the drop in imports.
This is beyond ridiculous, even for you Hale. With all due respect,
a.) The only thing that matters is personal consumption expenditures, which drives over 70% of our GDP. According to the chart on the St. Louis Fed's website, PCE has turned extremely nasty FOR THE FIRST TIME SINCE THE SECOND WORLD WAR! And understand, this same statistic rose steadily throughout every other recession in memory - early 2000s, early 1990s, early 1980s, 1970s - all of them!!!! This is clearly not your father's recession, if it's a recession at all. That much is painfully simple no matter how much you deny it, and this is not doom and gloom - it's facts.
b.) World trade, as well as global industrial output, have fallen considerably more in a similar time frame than they did after the crash of 1929 - with literally no sign of letting up. And you're claiming that trade is going to revive the U.S. economy? Geez Bonddad, you need some new material - seriously. This stuff isn't even funny anymore!
"This is clearly not your father's recession" - nope, it's your grandfather's credit driven depression. Tighten your belts, it's only 1930...
Yeah as I recall '32 was a bit challenging. Yipes.
Sounds like you're happy about your "facts" Hearmenot. Cheer up.
Ignorance is bliss, Tim - who's happy now?
Bonddad: "Trade is only 13% of GDP so it can't be the primary driver of growth (at least not yet). But suppose it grew just enough to pick up the slack from the drop in consumer spending that is coming (or at least helped to slow the decline in growth). According to the latest BEA data personal consumption expenditures totaled $9.9 trillion in the first quarter while exports totaled $1.724 trillion. That means a 1% drop in PCEs would need a slightly larger 1% growth in exports (along with a stabilizing or declining imports)."
Someone has to go back and check his arithmetic. A 1% drop in consumer spending is 0.099 trillion. To offset this drop the exports have to grow to 1.823 trillions, or 5.7%.
Export products to whom? The U.S. consumer has been the source of final demand in the world. Until we know who is going to pick up the slack the idea of the U.S. creating an export driven economy ala China or Germany is a pipe dream.
http://www.escapethenewgreatdepression.com
Isn't the USA the 2nd or 3rd in total exports? I thought it was now China, then Germany/USA -- I know that Germany and USA were so close it was always changing who was 2nd.
The really interesting statistics is the per-capita export:
http://www.nationmaster.com/graph/eco_exp_percap-economy-exports-per-capita
We are way behind the curve...
If you look at German history, after WW II most of the demand was internal... the country had to be rebuilt from the rubble. The result is called "Wirtschaftswunder" and Germans like to think about it in romantic terms. It was in the 1970s and 1980s that exports had to take over what internal demand could not deliver any longer. There was quite a struggle for German manufacturers to get attuned to a global economy where they could not rely on internal demand paying for the bills any longer.
China is on the opposite path... they got started with external demand and now they are building an internal market that is much larger and more lasting than the export market can be. The good times are still ahead for the Chinese... if they manage to get their environmental problems under control.
To a large extent it was a boom in exports which kept the economy strong from mid-2006 to mid-2008, after the housing boom peaked in early 2006.
Actually it was Bush's never ending borrowing from China going into the books as GDP (rather than as Debt!) that caused that particular mirage.
The economy hasn't been strong since the early 80s. Supply Side economics henchmen changed the game, changed the definitions - exported all of our industries and intellectual property in a fire sale and left 98% of Americans in 3rd world status.
In the 90s, there was at least the *illusion* of wealth, - the Wallstreet casino owners dangled the credit carrot in front of Americans so that the reality that there was no economy could be further post-poned. Since Americans were 2nd and 3rd mortgaging everything, it was easy for halfwit henchmen like Greenspan to change the real defintion of GDP and to boast productivity over income.
The entire system is a crual hoax designed to make only kings and slaves. Hopefully, everything about Friedman economics will be tied to a cinder-block and dumped far into the Atlantic by the time Obama's first term is over.
Third world status means a large house, two cars, a big screen TV, cable with 100 channels, a computer with high speed internet, eating out all the time, etc. etc. If that's third world status, then the third world has been doing pretty darn good.
The sharp contraction in GDP appears to be nearly at an end. Some forecasting firms are even predicting positive second quarter growth. Obama will be vindicated, and those Republicans attacking the stimulus are going to look like even bigger jackasses, if that is possible.
As an Obama supporter I wish you were right - but you're not. U.S. GDP has been artificially boosted by the largest equities bubble and housing bubbles in U.S. history and there's nothing left worth blowing up. Consider the fact that U.S. GDP since 2000 only averaged .2% growth - yes, you read that correct, point two percent! - once you subtract cash derived from mortgage equity withdrawals, which no longer exists. That U.S. consumers are recovering from the collapsing values of their stock market portfolios, homes, pensions, etc., and now are saving more and spending less because they must. That unemployment has increased faster than any time since the 1930s and will soon be in double digits where it will almost certainly stay for at least a year or two. That commercial realtors are saying that at least 25% of that space must "evaporate" because it outstrips the absurd demand created from the era of debt-financed mass consumption, while residential real estate still faces a massive wave of option ARM loan resets which will add to the already epic levels of existing supply (including of course the shadow inventory that official statistics don't acknowledge). And not a word of this is doom and gloom, none of it is Republican or Democrat, it's just the situation that we face. So please tell me bob, because if you have input I'd honestly love to hear it, where on Earth is the GDP going to come from?
Hmmmm...I don't think there will be a problem with Americans becoming less import oriented. We're broke. Unless we come up with some manufacturing jobs, farming jobs and energy production here we're looking at a lifetime of dependency. Maybe becoming more self sufficent as a country is in order. Starting with free or low cost educations for our citizens so we won't have a nation of workers whose battle cry is "Do you wnt fries with that?"
It would be interesting to see a breakout of "exports" between the manufacture of durable goods that we export abroad versus the "financially-engineered" products to which Summers refers. I imagine that in the boom years of 2002 to mid-2007, a lot of what we were "exporting" were the derivatives of the mortgage market, toxic crud that the world bought up in the belief that the American real estate market would always go up. My understanding is that about 40% of all corporate profitability during those boom years owed to FIRE (financial, insurance and real estate) activity. I don't see how an "increase" in export activity is going to come about. Both imports and exports have reset at lower levels of activity, consistent with the general economic decline. Summers is just stating an aspirational goal - he wishes we exported different things than we actually do. As far as the weak dollar is concerned, Bush used a weak dollar regime for years in an effort to improve the trade deficit - what is new about that, and why do we think it will provide an answer now? And all that debt poses one very serious problem - if interest rates have to move higher to keep attracting foreign investment, what will happen to the solvency of the federal government, or what's left of it?
As Paixia3 pointed out..."if we had enough INDUSTRIES and world class products to offer, and paid people what they are worth...", then perhaps an increase in international trade might eventually become a bright spot in in our economy.
Sure would be nice to have some sector of our economy actually improving enough to create more jobs.
That said, I'm not sure that decreasing our trade deficit by a few percentage points will be enough of a impetus to overcome the cold hard reality that our economy has been stuck in neutral for several decades.
Over the past 3 decades, we have lost considerable ground in our manufacturing capacity, and nothing short of very concerted man to the moon type of effort will bring our manufacturing capcity back up to levels that will make a difference.
Right now , about the only part of our economy that appears to be growing is our debt .
exactly. we don't MAKE anything in this country to EXPORT anymore.
Thank you, W, for making sure we can always get crap from China cheap and that is unsafe. It was just a bonus that it put American manufacturers out of business.
I don't know about you... everybody I known and work with makes stuff in this country... now, I do know mostly highly educated people from physical and life science... but then, in order to make something competitive today, you got to have an edge...
:-)
What portiion of the trade deficit is due to American companies bringing in products either as their own brand or for direct sale as opposed to products imported by foreign companies? This matters because the profits such companies report are counted as part of the GDP.
Also, what is the role of the local in an economy? Assuming that communities are shareholders in the economy, what is the accumulative cost of not sending locally?
Here is my question: There are many products that are labeled as "American" like for instance HP, Dell or apple notebooks that are actually designed and made overseas by Quantas that owns with ComPal 90% of the international Market, however put together here in the US and sold to everywhere. How can that calculate correctly as part of GDP.
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