First Quarter GDP Likely Negative as Trade Deficit Soars

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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.

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.

15 comments

  1. rjs

    since it seems the lion’s share of that imports increase came from the backed up boats unloading at west coast ports, most of that will be included in wholesale inventories, which will be released next week…that being the case, there should be an offsetting increase in inventories which will add to GDP by nearly as much as the increase in imports subtracts..

    1. rjs

      for instance, our imports of consumer goods rose by $9,013 million to $54,164 million on a $1,677 increase in imports of cell phones and similar household electronics, a $1,293 increase in imports of synthetic textiles, and a $981 million increase in our imports of furniture and similar household goods..moreover, our imports of cotton apparel and household goods, footwear, pharmaceutical preparations, toys, games, and sporting goods, televisions and video equipment. other consumer nondurables, non textile apparel and household goods, household appliances cookware, cutlery, tools, and camping apparel and gear all also rose by more that $250 million each, which almost certainly do not indicate an increase in consumption by that much, but rather just an offloading of ships…
      imports subtract from GDP only because they represent production for consumption or investment in the quarter that was not produced domestically; if they’re not included, they can’t be subtracted…

  2. Ben Johannson

    It seems all but forgotten the Big Three, while losing market share to the Japanese in the 1970s, were still profitable until Volker’s relentless rate increases forced a 60% appreciation of the dollar. U.S. manufacturers saw a rapid collapse in their overseas sales as American goods became totally uncompetitive in terms of price.

    1. Larry

      That was kind of the point though, wasn’t it? To break the back of labor unions the big three had to suffer a bit. But Uncle Sammy is always there with a bail out as long as union membership goes down, manufacturing shifts to right to work states and Mexico, and what remains of the union keeps getting chopped down with two-tier wages.

      1. sam s smith

        The Big 3 are incredibly efficient now a days as compared to the 70’s.

        It takes ~20 hours of labor to assemble a vehicle now.

        With the new starting wage at $14/hr, a $50,000 Cadilac can be assembled for $280 in labor costs.

  3. James Levy

    This demonstrates how the “debasing the currency!” cries over the past decade are off the mark. The Fed keeps inventing dollars out of the electronic ether but the dollar continually rises. That is, of course, because the value of a currency is largely a political and a military matter. The dollar is strong because the people who hold dollars trust Uncle Sam to protect them from angry mobs who might take away those dollars at home and overseas, and are still confident that old Uncle Sam has the muscle and the will to do it. The dollar is strong because the dollar is safe, and it’s safe because of who rules America and how those rulers write the rules nationally and internationally. Increases in the money supply have a marginal impact, but faith that the Power Elite will continue to reign here props up the value of the dollar.

  4. curlydan

    “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.” Unfortunately, I think our “weak dollar” policy (trumped recently by weaker Euro and other currency policies) is undermining our economic health as well. It’s pushed money into stock buybacks, inflated stock prices, punished elderly savers, and pressured insurance companies and pensions into riskier investments.

  5. washunate

    It goes without saying that the lack of a crackdown on currency manipulation from China, Japan and the Pacific Rim really hurts here.

    The focus on relative currency values does a disservice because it focuses on the quantity of money. The issue in our era is distribution, not quantity. And over a longer time frame, manipulation is a bizarre charge. The US has been the global leader in manipulation in the post-Bretton Woods world. Healthcare, education, defense, finance, real estate, law, and other areas of active government involvement have increased dramatically in dollar prices. Even gold, silver, and copper, the anchors of the old system, have dramatically increased in price. Copper is so expensive we don’t even use it in pennies anymore.

    And of course, the Bretton Woods period itself was, by definition, government manipulation. That’s what a fixed exchange rate system is. Just google the London Gold Pool.

    In a world of floating exchange rates, currency values will take of themselves if we have sensible tax and spending policies domestically. If we don’t – if we have taxes that are too low on rich people and spending that is too high on waste and abuse – then it is irrelevant what China, Japan, and others do with their own national currencies.

  6. JTMcPhee

    Tell me again, Grampa — what was “money?” I know you’ve explained it to me a lot of times before, but it just doesn’t seem to make any sense! Maybe it’s just that I’m not smart enough to follow…

  7. Greenbacker

    Yeah, but consumer spending is going to get revised up for March. Real PC spending level of around .6-8%. Average that level and you get 2.8% just for that month alone. Probably looking at 6-7% PCE for the 2nd quarter.

  8. kevinearick

    Acerbic: Guilty by Non-Association

    If you have placed yourself at the beginning of an empire phase, with no privacy intrusion, and you and your spouse are both putting in 10%, at combined wages 4X rent, by how much should you increase participation and when, for each child, to maintain the required slip, torque and speed?

    A motor is a motor is a motor, whether it is connected by a wire rope, an electrical circuit or an idea. Being an expert button pusher, computer programmer or healthcare controller isn’t going to get anyone anywhere without a motor, and marriage is the motor, regardless of all the noise in empire event horizons to the contrary.

    Feudalism is just the counterweight, crony capitalism, socialism and communism, in a distribution, which hasn’t changed in thousands of years, replacing parents and blaming them for the symptoms, of breeding ponzi slaves, a natural disaster always waiting to happen. GDP is nothing more than a make-work accounting activity, simulating increasing return on decreasing risk, until the actuarial ponzi implodes and the middle class goes to war, with itself.

    The President is no more powerful than the person serving you a Big Mac.

    Any group of monkeys can clear-cut a forest, and any ape employing them can keep a percentage of the wood, to sell back to the monkeys at an increasing rate of inflation when there is no wood. At economic discharge, with labor shorted out by technology, where must the counterweight begin, how much must it be over-weighted, and what happens to car capacity?

    Ignoring BS GDP natural resource exploitation noise, what is happening to income disparity and wealth distribution in the real world, beyond the gravitational black hole in the global city?

    You can’t piss away half your life on RE inflation, in exchange for natural resource exploitation, and provide for your children, which is required by equal rights under the law, always voted for by the majority, to massively subsidize Family Law. Fed margin leveraging Smartphone accounting profit is not an economy; it’s a surveillance system. Polling monkeys and apes is no way to design infrastructure.

    Feudalism has no past, no future, and no present, except as a reference voltage, created by a circle jerk, of which there is no shortage. DNA is simple math, but it is a derivative, as is the language of artificial emotion, now trying to implement artificial intelligence, with a totally integrated, but irrelevant, cloud, over the senses of the senseless.

    The majority, of all stripes, voting to print itself money and a minority to chase it, with decreasing return on increasing time, doing stupid, and threatening to take children for non-compliance, hiding behind revolving political scapegoats, hired for the purpose, is new how?

    Capital employs the middle class to replace labor with technology, a derivative of labor, with a credit access multiplexer to filter outcomes, relative to each other. Labor doesn’t care because it can discount rent at will and place it on the other side of the fulcrum. Capital hates that, but as a derivative itself, has no say in the matter. All goes well, until capital induces the middle class to become a landlord, temporarily, destroying itself

    Despite every attempt to convict labor of a crime, after the fact, to justify its behavior, the State has failed to do so, for many decades, in all of which RE inflation has swamped wage gain. Under such circumstances, you travel the forest and collect skills. When the polarity reverses, at natural quantum threshold, which it always does, you start cutting down trees, to build your family a house.

    Regardless of job, I have far more skills and knowledge than anyone around me, and I don’t care about the lack of pay differential, because I like my job, until the critters interfere with my family, and I cut the load, which I lifted up an exponential knowledge curve, far beyond the empire.

    If we were created equal, life would not exist. Equal outcomes is not equal opportunity, except in the minds of the senseless. Where were you, when there was work to be done?

  9. kevinearick

    Acerbic: Guilty by Non-Association

    If you have placed yourself at the beginning of an empire phase, with no privacy intrusion, and you and your spouse are both putting in 10%, at combined wages 4X rent, by how much should you increase participation and when, for each child, to maintain the required slip, torque and speed?

    A motor is a motor is a motor, whether it is connected by a wire rope, an electrical circuit or an idea. Being an expert button pusher, computer programmer or healthcare controller isn’t going to get anyone anywhere without a motor, and marriage is the motor, regardless of all the noise in empire event horizons to the contrary.

    Feudalism is just the counterweight, crony capitalism, socialism and communism, in a distribution, which hasn’t changed in thousands of years, replacing parents and blaming them for the symptoms, of breeding ponzi slaves, a natural disaster always waiting to happen. GDP is nothing more than a make-work accounting activity, simulating increasing return on decreasing risk, until the actuarial ponzi implodes and the middle class goes to war, with itself.

    The President is no more powerful than the person serving you a Big Mac.

    Any group of monkeys can clear-cut a forest, and any ape employing them can keep a percentage of the wood, to sell back to the monkeys at an increasing rate of inflation when there is no wood. At economic discharge, with labor shorted out by technology, where must the counterweight begin, how much must it be over-weighted, and what happens to car capacity?

    Ignoring BS GDP natural resource exploitation noise, what is happening to income disparity and wealth distribution in the real world, beyond the gravitational black hole in the global city?

    You can’t piss away half your life on RE inflation, in exchange for natural resource exploitation, and provide for your children, which is required by equal rights under the law, always voted for by the majority, to massively subsidize Family Law. Fed margin leveraging Smartphone accounting profit is not an economy; it’s a surveillance system. Polling monkeys and apes is no way to design infrastructure.

    Feudalism has no past, no future, and no present, except as a reference voltage, created by a circle jerk, of which there is no shortage. DNA is simple math, but it is a derivative, as is the language of artificial emotion, now trying to implement artificial intelligence, with a totally integrated, but irrelevant, cloud, over the senses of the senseless.

    The majority, of all stripes, voting to print itself money and a minority to chase it, with decreasing return on increasing time, doing stupid, and threatening to take children for non-compliance, hiding behind revolving political scapegoats, hired for the purpose, is new how?

    Capital employs the middle class to replace labor with technology, a derivative of labor, with a credit access multiplexer to filter outcomes, relative to each other. Labor doesn’t care because it can discount rent at will and place it on the other side of the fulcrum. Capital hates that, but as a derivative itself, has no say in the matter. All goes well, until capital induces the middle class to become a landlord, temporarily, destroying itself.

    Despite every attempt to convict labor of a crime, after the fact, to justify its behavior, the State has failed to do so, for many decades, in all of which RE inflation has swamped wage gain. Under such circumstances, you travel the forest and collect skills. When the polarity reverses, at natural quantum threshold, which it always does, you start cutting down trees, to build your family a house.

    Regardless of job, I have far more skills and knowledge than anyone around me, and I don’t care about the lack of pay differential, because I like my job, until the critters interfere with my family, and I cut the load, which I lifted up an exponential knowledge curve, far beyond the empire.

    If we were created equal, life would not exist. Equal outcomes is not equal opportunity, except in the minds of the senseless. Where were you, when there was work to be done?

Comments are closed.