KEY DATA: Deficit: +5.9%; Exports: +2.2%; Imports: +3.2%/ Openings: -204,000; Layoffs: -272,000; Hires: +16,000
IN A NUTSHELL: “The skyrocketing trade deficit may not make a large dent in the record third quarter growth, but going forward it could be a real problem.”
WHAT IT MEANS: The reopening of the economy has worked its magic on economic growth, but there is still one problem area for the economy, the trade sector. The U.S. deficit with the rest of the world soared again in August. Exports have begun to pick up, but imports are rising more rapidly. Keep in mind; we buy well over twenty percent more goods from the rest of the world than we sell to those countries, so the difference in the growth rate is magnified. The resulting monthly trade deficit was the largest since August 2006. So far this year, the total trade deficit is slightly down, though given the recent trends and the continued economic weakness around the world, we will likely wind up with a widening deficit for all of 2020. So much for trade wars and recessions narrowing the deficit. The trade war didn’t help much on the export side and the recession only slowed imports for a few months. Where the trade war seemed to make a huge difference was with the imbalance with China. For the first eight months of the year, the deficit with China has shrunk by 16.5%. But that was all in imports. The hoped for bump in our sales to China that was supposed to come from the trade agreement signed earlier this year went the way of the longest expansion on record. Instead, our sales to China are down a little less than one percent. Don’t expect that to be made up anytime soon, if at all. As for the impact on growth, it looks like the widening deficit could cut growth by well over one percentage point, but given that third quarter growth estimates range from the upper twenties to the mid-thirties, that will hardly make a dent in the historic number.
As for the labor market, conditions are really good and today’s report did little to dispel that notion. The Job Openings and Labor Turnover survey (commonly called JOLTS) indicated that openings fell in August. However, the level is still pretty high. Maybe more importantly, layoffs and discharges declined and are back to what we would see in a growing economy. But workers don’t feel a whole lot confident as quits declined as well. The quit rate is pretty low.
IMPLICATIONS: Today’s reports basically confirm what we already knew: The trade situation is bad and deteriorating further while the labor market situation is getting a lot better. That means little for the third quarter but possibly a lot for next year, when growth rates will resemble more typical years. The election could have an impact on our economic relationships not just with China but Europe and Mexico as well. If Trump is reelected, you can assume that the trade wars we are running will be ramped up further. Like most economists, I don’t think trade wars do anyone any good. Companies are not going to come running back to the U.S. if there are countries other than China where they can produce their goods at a huge discount to the costs of U.S. manufacturing. It would take massive subsidies to get that to happen and I doubt a Democratic House would go for that. If Biden is elected, the pressure on China might ease up, but not go away. Where it could get better is with Europe and especially the rest of Asia. The TPP trade agreement, which actually made conceptual sense in that it was intended to isolate China from the rest of Asia and open new markets for the U.S., might be resurrected. Maybe we can bring home some of the critical products in our supply chain by passing laws requiring them to be produced here, but that will raise costs to U.S. companies and individuals that need those products. Which means the government may have to subsidize their production and/or purchase. Four weeks to Election Day and who knows how long afterward until we know who won. Should be a very interesting month or two.