Declining Trade Deficit Indicates Potential for Substantial Gains in GDP Growth

Just a single month after an increase in the US trade deficit inspired at least some degree of pause among economists, the $4-billion decline in the trade gap measuring goods has offered ample reason for economic optimism as well as the likelihood of continued GDP growth. While the January numbers indicated a trade deficit totaling $68.8 billion, data from the month of February indicated the trade gap closed to just $64.8 billion, leading some economic analyses to alter GDP growth prognostications by as much as half of a percentage point.

It is necessary to point out, however, that data taken from the opening months of any new year are subject to substantial variances because of a number of factors that remain somewhat fluid — yet not entirely unpredictable — on a year-to-year basis. The Chinese lunar new year, for example, has a significant influence on the national trade deficit of the US, as the overwhelming majority of China’s businesses shut down for the duration of the holiday. With China, more so than any other country, the US holds its greatest trade deficit, which is why the annual holiday wields so much influence over early year trade deficit metrics.

Even after accounting for the influence of the Chinese lunar new year, the decline in the US trade deficit supports the notion held by many economists regarding the potential for continued economic growth going forward. In fact, the likelihood of continued GDP growth is further bolstered by increases in inventory production, including both retail and wholesale inventories. In the case of both retail and wholesale inventories, the February data shows an increase of 0.4 percent.

With the closing of the trade deficit gap of $4 billion from January to February, along with significant data demonstrating a 0.4 percent increase in inventory production across retail and wholesale inventories, it seems clear that the economy is poised for a period of sustained growth in GDP, even in the face of the recently released data indicating a first-quarter slowdown for the 2017 year.

As most economists — not to mention the officials at the Federal Reserve — have concluded, the first-quarter slowdown in GDP growth does not appear indicative of an emerging economic trend. Instead, a closer look at the data reveals the existence of the necessary preconditions supporting the onset of a sustained period of stable economic growth. Given the fact that service-related trade patterns tend to remain stable and relatively predictive on a month-to-month basis, the $4-billion decline in the trade deficit pertaining only to goods offers ample support for an optimistic economic view for the foreseeable future.

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