Latest Data Show Weakening Contribution Of Net Exports To GDP Growth

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The latest data show that the contribution of net exports to US GDP growth turned negative in Q4 2016.

Throughout the recovery, net exports were a positive contributor to growth.

Net export weakness adds a note of caution at a time of uncertainty over trade policy.

Friday's data release from the Bureau of Economic Analysis shows US GDP growth slowing from a 3.5 percent annual rate in the third quarter to just 1.9 percent in Q4. One factor behind the slowdown deserves a closer look - the declining contribution of net exports to GDP growth. (The usual caveat applies to all the numbers reported in this post. This week's data are "advance" estimates, subject to revision. The average revision of GDP growth from advance to final estimate, without regard to sign, is a substantial 1.1 percentage points.)

The following chart shows that the contribution of net exports to growth was positive during the middle years of the recovery, and had just begun to turn positive again after a dip in 2014 and 2015. Because the net export component of growth is volatile from quarter to quarter, I have drawn the chart to highlight the four-quarter moving average, with the actual quarterly data in the background. Whether we look at the quarterly data or the moving average, though, it is clear that the hopeful trend toward stronger net exports was reversed in the last quarter of 2016.

The numbers here do not represent the absolute rate of growth of imports or exports, but rather, the degree to which they "contribute" to the growth of the economy as a whole. The "contribution" of net exports in Q4 2016 was -1.7 percentage points. That means without the drag from net exports, the economy as a whole would have expanded at a brisk 3.6 percent in the quarter rather than the anemic 1.9 percent actually reported.

We can fill in the picture by looking separately at the export and import components, shown in the next chart. Keep in mind that exports enter into the GDP accounts with a positive sign, while imports enter with a negative sign. For that reason, a negative "contribution" of imports to GDP growth means imports themselves increased during the period. The contribution of net exports to GDP shown in the previous charts is the sum of the contributions of imports and exports shown in this chart.

During the worst quarters of the Great Recession, in 2008 and 2009, the contribution of net exports was strongly positive, because although exports slowed, imports slowed even more rapidly. Early in the recovery that pattern reversed, with exports growing but imports growing even faster. In the middle years of the recovery, exports played a consistently positive role. That was offset substantially, but not entirely, by the negative contribution of growing imports.

In the latest data, both imports and exports play a negative role. Looking at the data for Q4 2016, we see deteriorating export performance contributed -0.53 percentage points to GDP growth, while growing imports contributed -1.17 percentage points, making the net contribution -1.7 percentage points, as shown in the previous chart.

The weakening performance of net exports adds a note of caution, coming as it does at the beginning of a year of uncertainty in which changes in trade policy are likely to disrupt both import and export markets.

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