GDP: the best kind of bad news

By Felix Salmon
August 27, 2010
this is the best sort of sluggish growth to have:

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If you’re going to have a sluggish growth figure, this is the best sort of sluggish growth to have:

Growth in the last quarter was stifled by a 32.4 percent surge in imports, the largest since the first quarter of 1984, dwarfing a 9.1 percent rise in exports. That created a trade deficit, which sliced off 3.37 percentage points from GDP, the largest subtraction since the fourth quarter of 1947.

Obviously, a trade surplus would be better than a trade deficit, especially in terms of generating employment growth domestically rather than abroad. But exports did rise, at quite a healthy clip. They were just eclipsed by this whopping rise in imports — which are a sign that there’s still a lot of demand in the economy.

This is a subject which came up at the Treasury blogger meeting last week: while no one at Treasury is exactly overjoyed at seeing imports rising so much faster than exports, any sign of increased economic activity is being taken as a good sign. Certainly this kind of thing is preferable to seeing the opposite happen, where exports fall and imports fall faster. Even if that would have a better effect on GDP.

19 comments

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Yes, indeed, the fact that the vast majority of the growth in domestic demand is going to the benefit of China, Germany and Japan is “good news.” Bodes very well for the unemployment rate in those countries. I wonder though… how long will the demand continue to grow if the benefits of this growth continue to accrue to foreign countries? This is all very short sighted of you and Treasury officials alike.

Let me put it another way that may be easier to understand: without the 3.37% drag on growth that comes from trade deficit, 2Q growth rate would be very nearly 5%. One might even call that “healthy”. That’s a bit idealistic, of course, because no rebalancing of currency would help us rid of the petroleum defecit for the time being, and a general increase in prices of Chinese goods might reduce overall demand, but still…
What we have instead of that hypothetical 4-5% growth is an 8% growth in Germany a 10% growth in China, falling unemployment in both of those countries and growing unemployment in ours. Wonderful, just wonderful.

Posted by Y.Alekseyev | Report as abusive

Looks to me like a significant part of our stimulus is stimulating other countries.

Posted by MattJ | Report as abusive

Seems to suggest that the US$ might be overvalued v. some of the country’s major trading partners.

Posted by david3 | Report as abusive

“Obviously, a trade surplus would be better than a trade deficit, especially in terms of generating employment growth domestically rather than abroad.”
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This is a popular myth. The U.S. federal government has the unlimited ability to create money, just by pushing a button. A trade deficit is an example of one country devoting great effort to create scarce materials for another country in exchange for something that requires no effort by the other country.
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In that sense, China is our servant. They work, sweat and strain to create and ship to us the things we want, thereby improving our living standards, while we, hardly lifting a finger, ship dollars to them. Who has the better deal?
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The loss of employment comes from insufficient federal deficit spending (money creation), which is what really creates jobs. Given sufficient money, Americans will buy enough goods and services to create jobs for everyone.

Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive

lol @ comment “just by pusing a button” by Rodger
This guy clearly has no idea what he’s talking about. Also, the money creation that the US is currently doing, is already undermining it as a reserve currency, steps are already in motion for countries to dedollarize around the world and buy other currencies as reserves. The more money the US prints, the faster other countries move towards getting rid of the Dollar.

Posted by mastershakejb | Report as abusive

The USD has been on a downward slide for a number of years, driven by the double deficit in both govt spending and trade. Weak monetary policy has driven imports upwards, while profligate Republican spending was on a Bridge to Nowhere while cutting too many taxes during a period of wartime spending.

Clearly a weaker currency increases the costs of imports, and the appetite for them of the US consumer is unparalleled in the Western world.

Posted by FifthDecade | Report as abusive

“Obviously, a trade surplus would be better than a trade deficit, especially in terms of generating employment growth domestically rather than abroad.”

I’m a little puzzled as to what kind of conventional wisdom that statement would be “obvious”. It’s not trade balances that affect employment, rather domestic conditions (including employment) that affect trade balances. In fact, the US has had a growing trade deficit since the mid 70′s during preiods of economic expansion and the only time this trade deficit has decreased has been during the 4 recessions (i.e. the exact opposite of the “obvious” conclusion you’re making). One extremely important factor to keep in mind is that the value of imports does not differentiate between raw material and finished products. Much of the imports to the US are for raw material used in the manufacturing of goods for both domestic consumption and exports.

Also to Mr. Mitchell with that rather simplistic view. You can not simply print money and expect your money to be worth the same amount to your trading partner (i.e. the Chinese are neither stupid nor your “servants”). As the supply of money goes up (i.e. you print more money), the value of your currency depreciates, making the same goods cost more the next time you import them (i.e. your trading partner will ask you for more money for the same item). This will go on until it costs less to produce the same item domestically at which point you’ll see the US trade deficit starting to come down. This is not going to happen until at least the middle of this decade when Chinese labour costs near those of the US – which means US labour costs will shrink and Chinese ones will expand. In other words, until this master servant relationship is shattered, you will see China’s export driven economy be a drag on the US.

Posted by Beh | Report as abusive

Chasing worker wages ever downwards is a dangerously misleading attraction. It’s a simplistic attitude based on the greed of “less for them equals more for me” thinking.

It doesn’t have to be that way: Germany has fairly high labour costs yet is a net exporter of goods, including to both the US and China. But in Germany, investors have long term horizons and employers invest in staff and plant, while the education system produces highly competent and technically sophisticated workers with high productivity levels.

Posted by FifthDecade | Report as abusive

Economic myths injure our economy. Mr. “Beh” quotes one of those myths: “As the supply of money goes up (i.e. you print more money), the value of your currency depreciates . . .” Widely believed, yet historically false.
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Since 1971, the end of the gold standard, there has been zero relationship between federal deficit spending (which increases the money supply) and inflation. The reasons why can be seen at INFLATION .
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An unnamed person lol’d at this statement: “The U.S. federal government has the unlimited ability to create money, just by pushing a button.” That is exactly the way the federal government creates money, which is nothing more than notations in electronic balance sheets.
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If you who would like to spend one half hour learning more about economics than you believed possible, I recommend 7 Deadly Innocent Frauds by Warren Mosler. It lists the myths and the realities of economics.
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Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive

Hmm, so printing money never undermines the value of the currency? You seem to have forgotten what happened in Europe in the 1930s, and in Zimbabwe in the last decade when hyperinflation from printing extra money severely weakened the currency.

Posted by FifthDecade | Report as abusive

The hyperinflation of Germany was caused by the onerous payment conditions put on them as a result of WWI. The hyperinflation of Zimbabwe was caused by civil war, Robert Mugabe and his band of criminals. In both cases, money printing was a result of the hyperinflation, not the cause.
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In nearly all cases, hyperinflation causes money printing, not the other way around, and is caused by economic circumstances unique to each country.
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Did you look at the report at INFLATION?
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Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive

Yes, but there is a difference between causal and correlated relationships. You should separate your arguments for what goes on inside a country (inflation) with what happens outside (FX fluctuations).

Posted by FifthDecade | Report as abusive

Yes, FX fluctuations are not inflation. Glad we have that settled. So?

Posted by rodgermitchell | Report as abusive

A trade deficit is not always bad news.

In a recessionary period manufacturers and traders cut back on inventories in order to preserve cash.

A time then comes that whilst it appears one is still in the recessionary period those same manufacturers and traders decide that the time is right to start rebuild their raw materials and stock in order to satisfy what they perceive as increased demand which hopefully would result in increased exports and sales.

The problem is, have they got the timing wrong and or is the defecit in imports over exports as a result of sucking in consummer products as opposed to the materials required for export products.

Posted by GROCK | Report as abusive

For a monetarily sovereign nation, a trade deficit never is bad news for a monetarily sovereign nation. It means the monetarily sovereign nation is trading the money it easily creates, at the push of a button, for goods and services.
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The word “deficit” has even economists confused. It properly should be called a “trade surplus,” because while we receive hard-to-produce cars and clothing, all our trading partners get is our money, which the central government can create in infinite quantity, with no effort whatsoever.
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The situation is different for the PIIGS, which are not monetarily sovereign, and so do not have the unlimited ability to create money.
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The key is monetary sovereignty, which must be understood in any discussion of trade or government deficits.
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Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive

Rodger is essentially correct. Our trade deficit is necessarily matched by foreign investment in US securities. (Think China and Japan buying US Treasuries.) In a crisis, there are various ways that these obligations can be repudiated, devalued, or outright nationalized.

The problem with those solutions is that any of them would destroy the business-friendly climate that has allowed us to support a massive trade imbalance over the last 15 years. If foreigners are unwilling to invest in the US, then they will be unwilling to accept dollar-denominated payments in excess of their current needs.

One way or another, the present situation is unsustainable.

Posted by TFF | Report as abusive

One way or another, the present situation is unsustainable.”

Why unsustainable?

Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive

Rodger, the trade imbalance is over half a trillion dollars annually. Do you really expect foreign interest in US securities to continue growing at that pace?

Posted by TFF | Report as abusive

TFF,

Actually, I don’t care whether foreign interest in U.S. securities disappears, altogether. The U.S. government has no need to trade T-securities for dollars. A monetarily sovereign nation produces its own money by spending. Borrowing its own money is a relic of the gold standard days.
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Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive