Is Trade a Plus or Minus for U.S. Growth?

by: Michael Mandel

Is trade a plus or minus for U.S. growth in this recovery? This is obviously an important question, given that domestic demand is likely to be stagnant for sometime. We’d like to see net exports becoming less negative, which would indicate that trade is a source of growth for the U.S. economy.

However, Friday morning’s GDP release gave an ambiguous answer to this question. If we look at net exports of goods and services, measured in nominal dollars, the trade gap has increased over the past year from $379 billion in the first quarter of 2009 to $504 billion in the first quarter of 2010 (measured at annual rates).

Click to enlarge

But if we look at the trade gap adjusting for price changes, it’s actually shrunk over the past year, from $387 billion to $367 billion (click to enlarge).

In other words, the real gap is shrinking while the nominal gap is increasing.

The same pattern holds over the past ten years as well. In nominal dollars, the trade gap has increased since 2000, making it a drag on the economy. Meanwhile in real dollars the trade gap has shrunk (click to enlarge).

The apparent shrinkage of the real trade gap since 2000 is either one of the key positive facts about the U.S. economy, or an exceedingly misleading statistical illusion.