Monday, 1 August 2011

Not only debt ceiling deal but worsening trade deficit negative for US growth

By John Ross

Numerous commentators have analysed the negative implications for US growth of the debt deal between President Obama and Republican leaders in the US Congress – this is considered below. But an aspect which should be integrated into analysis is that the drag on growth represented by the cuts in government spending in a debt deal will interact with another negative trend – the widening US trade deficit.

The primary causes of slow growth of the US economy are domestic – above all failure to overcome the severe fall in fixed investment which occurred during the ‘Great Recession’. However a secondary lowering of US growth is being created by its trade position - despite hopes that the decline in the exchange rate of the dollar would boost US net exports.

Instead of assisting US growth the US trade deficit has been widening – i.e. net exports are falling. The US trade balance, having reached a low of $25.5bn in May 2011, increased to $50.2bn in May 2011 - the latest month for which data is available. This is shown in Figure 1. Figure 2 shows the same data expressed as a three month moving average in order to remove the effect of shorter term fluctuations.

As a percentage of GDP, the deficit on US net exports has increased from a low of 3.4 per cent of GDP in the 4th quarter of 2010 to 3.9 per cent of GDP in the 2nd quarter of 2011 – as shown in Figure 3. Over that period this represents a 0.5 per cent of GDP downward pressure on US growth. It is clear from Figure 3 that the gap is increasing.

Given these trends, at the best US net trade is therefore unlikely to increase US GDP growth and is more likely to reduce it. Any sources of US growth will therefore necessarily have to be domestically generated.

This evidently interacts with a debt ceiling deal. The reduction in projected US government spending in an agreement, others things being equal, will primarily reduce the increase in government and household consumption – the latter through cuts in social spending programmes. With this consequent downward pressure on the growth of consumption, and no boost coming from net exports, significantly higher US economic growth would require a large boost in the only remaining source of demand – investment. But no substantial measures are being taken by the US government to increase either government or private investment.

No boost from net exports, constrained consumption, and no measures to boost investment is simply to break down into components the constraints which now exist on US growth. Given both domestic and international trends, the long term slowing of the US economy previously analysed in greater detail by this blog will continue.

Figure 1

11 08 01 Trade Balance

Figure 2

11 08 01 Trade Balance 3 Monthly Moving Average

Figure 3

11 08 01 Net Trade

1 comment:

Pete Jones said...

Whilst you make a convincing case for fixed investment being symptomatic of china's growth at a time of US recession, the argument for it being causal is unmade. It appears prima facie that china is simply a more profitable outlet for investment than the US, primarily due to lower labour costs.
It seems to me that an interesting test would be to look at what proportion of fixed capital investment in China is foreign (or specifically of US origin), and then to consider what the impact on China would be if this were to be invested in the US instead?