By David Dayen, a lapsed blogger. Follow him on Twitter @ddayen.
Because of the blinkered way we talk about the economy in this country, news that the trade deficit widened in March well above consensus expectations will undoubtedly be met by cries that we must create more free trade deals to counteract that. Of course, the two have almost nothing to do with one another. In fact, what we’re likely seeing is that a strong dollar policy – usually promoted by the same officials who endorse free trade agreements – is significantly undermining our economic health.
First, to the numbers. Everything went up in March – imports, exports and the trade deficit – because of the impact of the resolution of the West Coast port strike. Goods flowed and a large backlog got worked through. The result was the worst monthly trade deficit in six years, but even the three-month rolling average increased around five percent relative to one year ago.
Fortunately, Administration officials are magicians that don’t count imports in trade statistics, so this was welcomed as good news. I have a press release from Commerce Secretary Penny Pritzker that begins, “Today’s data shows that despite challenges facing economies around the globe, the world wants what America is selling.” Really. She cited the 0.9 increase in exports and neglected the far faster increase in imports. Talking about trade while only talking about exports is like a sportscaster giving a score for only one team in a baseball game. “Today, Dodgers 4.”
The officialdom, on the other hand, seems not to know what to make of this development:
JPMorgan Chase economist Daniel Silver wrote to clients that “we do not know” if the weakness of exports is port-related, “or if the recent weakness in the data is mainly due to the stronger dollar.”
Other economists put the blame mainly on the port disruptions […] “Yes, the stronger dollar is playing a role here, but currency shifts simply don’t feed through into real trade flows that fast and that dramatically,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a client note. What he meant is that it takes time for people to change their buying patterns after a shift in exchange rates.
“That said,” Barclays Capital economist Jesse Hurwitz wrote, “we do expect the net trade balance to drag on overall growth over the next several quarters.” That’s partly because Americans are consuming more and partly because of the stronger dollar, he said.
What we do know is that the announced numbers were so far above expectations that the revised GDP growth for the first quarter will probably wind up negative, somewhere between -0.4% and -0.5%. Last year we had an even sharper decline in the first quarter, but enough growth subsequently to average out to middling GDP numbers.
It appears that the higher dollar is certainly playing a role in the economic sluggishness by making our exports too expensive. The fact that manufacturing employment numbers have gone negative and regional manufacturing inventory levels have collapsed points to that. But the dollar rally has actually slipped back a bit in the last few months. Federal Reserve communications could be making a deeper difference. Yellen and company have spent close to a year telegraphing a rate hike while the rest of the world eases, raising expectations globally. This Sober Look post lays out the consequences of that decision.
While the rest of the world is easing policy, the US central bank can’t begin tightening without negative consequences. And the global monetary policy is in a rapid easing mode. Except for Brazil, Ukraine, and a couple of other nations that have been desperately trying to defend their currencies, we’ve had over 30 individual rate cuts by central banks globally this year alone.
There is another way to think about this effect. The chart below shows the global nominal GDP growth (measured in US dollars) – which is projected to decline in 2015 for the first time since 2009 (see write-up). By swimming against the world’s monetary policy tide, the US risks “importing” some of that global slowdown. And that is indeed what the the Fed has done by telegraphing a hike this summer.
This just seems like a big mistake in communications, though with easing everywhere else some of it could not be avoided. As Dean Baker notes, you can’t just offset a $500-$600 billion annual deficit in trade. And you especially can’t when you’re swimming against a global current. The Fed looks unlikely to make that June rate hike now, postponing until at least September. But the damage might already be done. At some point, people have to be less cheered that dampening growth has held off the Fed from tightening. That’s just not a sustainable scenario, nor is it good for the country.
It goes without saying that the lack of a crackdown on currency manipulation from China, Japan and the Pacific Rim really hurts here. And TPP would do absolutely nothing to ameliorate that, despite it being a far greater factor at this point than tariffs.