Trade deficit drives GDP drop

Investment Analysis Clubs Macro Economic Trends and Risks
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https://wellsfargo.bluematrix.com/links2/html/2912560a-f0e7-…

**GDP Falls into the Trade Gap**
**by Tim Quinlan, Wells Fargo Economics**

**Summary**

**Net exports robbed the GDP bank in the first quarter, slicing 3.2 percentage points off of the headline growth rate, inventories and government spending cuts took another 0.8 points and 0.5 points, respectively. Those effects swamped what was actually a decent quarter for business and consumer spending and put the headline number underwater with a contraction of 1.4%.**

**First quarter GDP growth came in at -1.4%, which was well below the consensus expectation...**
**While looking at the broadest measure of GDP growth—including trade and inventories—has its merits, the pandemic era and its shocks to the supply chain and variable growth across the global economy added extra volatility. A good way to filter out some of that noise is to look at real final sales to domestic purchasers (Figure 1). This way of looking at the economy shows that real final sales actually picked up in the first quarter, expanding at a 2.6% annualized rate....** [end quote]

The calculation of GDP includes many factors which can move in different directions. For example, real final sales can increase, but total GDP can decrease if the spending is on imported goods and services so the trade deficit decreases (that’s subtracted).

Because of high spending on goods (instead of services) during Covid shutdowns, the U.S. balance of trade fell through the floor to a record $90 Billion. This also led to the shipping blockages that are causing inflation.

https://fred.stlouisfed.org/series/BOPGSTB

Now that the economy is opening due to Covid receding, consumers will probably shift their spending back toward their normal balance of more services than goods. If they do, the deficit may decline and GDP bounce back.

So the negative GDP reading isn’t due to a recession (when people reduce their buying). Sales are growing at a reasonable, sustainable rate. It’s a distortion in the GDP calculation caused by the huge trade deficit due to large orders of goods.

Wendy

8 Likes
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OOPS, I meant to say, “The trade deficit INCREASES, that’s negative for the GDP calculation.”
Wendy

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So the negative GDP reading isn’t due to a recession (when people reduce their buying). Sales are growing at a reasonable, sustainable rate. It’s a distortion in the GDP calculation caused by the huge trade deficit due to large orders of goods.

OOPS, I meant to say, “The trade deficit INCREASES, that’s negative for the GDP calculation.”

Wendy,

That is predicated on buying goods in 2020 to 2021 during the pandemic. In 1Q22 we do not know if other countries are not buying our goods because they are in lockdowns etc…or having bad economic problems because of inflation.

As far as importing and the trade balance that does not determine the GDP. Exporting does determine the GDP. In theory we now have our answer. Others are not buying our goods and services because of their economic problems. Notably China.

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Now that the economy is opening due to Covid receding, consumers will probably shift their spending back toward their normal balance of more services than goods. If they do, the deficit may decline and GDP bounce back.

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And inflation may decline.

Jaak

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“The trade deficit INCREASES, that’s negative for the GDP calculation.”

Probably because the ‘D’ stands for “domestic”, so it includes stuff made here in the USA, but doesn’t include stuff made outside the USA and shipped here. :joy: