23 January, 2013

Increase in U.S. Trade Deficit Leads To Decreased GDP Growth Projections

The latest available figures are showing that there has been an increase in the U.S. national trade deficit, and this deficit's increase has resulted in recent reductions in forecasts for GDP growth for the first part of 2013 from multiple analysts.
The major cause for the increase in the total U.S. trade deficit was a net increase in imports of 3.8% to $231.3 billion associated with a net increase in exports of only 1% to $182.6 billion. These total figures don’t show the entire picture, however, as trade deficits with OPEC nations and with China both decreased to some degree. The trade deficit for ‘petroleum goods’ in particular narrowed to a total of $23.5 billion in November of last year from $24.6 billion last October. However, the trade deficits with Canada (our largest trading partner) and the EU increased.  In total, the trade deficit increased to a total of $47.8 billion (which is an increase of 10.4%) from last October, according to a 13 January Bloomberg.com article by Alex Kowalski (URL: http://www.bloomberg.com/news/2012-01-13/u-s-trade-deficit-widened-more-than-forecast-to-47-8-billion.html).
The same Bloomberg article acknowledges an increase in crude oil prices ($102.50/barrel from $98.84/barrel) as a potential source of increased American import costs (total crude oil imports went from $26 billion to $27.3 billion). Once crude oil prices eased in December, the rate of increase of imports eased as well; imports decreased 0.1% in December, compared to an 0.8% increase the month before. Automobile imports rose late last year, as did imports of capital goods (to $48.3 billion, a new record). On the other hand, the increases in exports to newly-developed economies and industrializing nations helped offset these import increases vis-à-vis China and the OPEC nations.
It follows that the main source for the import deficit increase is an increase in the import deficit with the EU. Despite the weakening of the dollar making U.S. goods cheaper abroad, the goods deficit with EU nations rose 21.6%. One potential source of the net decrease in demand for American goods in the EU (and thus in exports to the EU) might be the continuing credit and debt problems currently endemic to much the region, though this explanation is incomplete, as it fails to account for the increased trade deficit with Germany, which has reached a new record size. This increasing trade deficit with the EU is particularly troubling, given that foreign trade in general has been critically important to the recovery from the economic downturn from 2007-2009.
                The fact that the trade deficit has increased has led to a downgrade in the projections for GDP growth in the U.S. Given that the formula for calculating GDP factors in the addition of a term defined as (exports – imports), it follows logically that any increased trade deficit (which implies an increase in imports and/or a decrease in exports) will result in a smaller number – or even a negative number, as is the case now- being added to consumer spending, investment, and government spending, which in turn leads to a smaller GDP. On this point, the multiplier is very important, as small changes in one area can have large impacts on the economy as a whole. For instance, a decrease in exports could have a multiplied effect as it would both increase the trade deficit as well as potentially decrease investment in capital as anticipations of growing demand are diminished.
                However, this doom and gloom must be tempered with an understanding that shocks from Superstorm Sandy and port strikes might be impacting these figures. That having been said, however, the growing trade deficit is a point of some concern to me.

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