In yesterday’s posting I wrote about how consumer spending had been supported in the first quarter by lower gasoline prices and a significantly lower tax take. In the current quarter, the comparisons won’t be as easy; most of the drop of gasoline prices has had its run and tax refunds will be much lower, although the Obama tax cut will have some positive effect.
Today I want to discuss the stimulus that GDP received from a sharp decline in our trade deficit. We don’t have the actual trade statistics for March yet, but the GDP report signifies that the trend to a lower trade deficit is continuing. Consider these figures: (in billions of constant $)
3Q’08 4Q’08 1Q’09
Exports 1,556.1 1,454.9 1,331.2
Imports 1909.1 1,819.4 1,639.5
NET EXPORTS -353.1 -364.5 -308.4
EFFECT ON GDP -11.4 +56.1
Okay, so the effect of imports declining more than exports was to add $56.1 billion to GDP, compared with a $11.4 billion negative effect in the 4Q 2008, making a total swing of $67.5 billion. That was the single largest positive for GDP in the first quarter. Interestingly, because the prices of our imports fell more than the prices of our exports (think oil), the effect on nominal GDP growth was even greater, making a positive contribution of $208 billion.
Which reminds of of some comments I made about two years ago, that as we entered a recessionary period, the considerable outsourcing of U.S. production to foreign factories would serve to make imports an unemployment shock absorber. That’s exactly what has happened.
Meanwhile, certain parts of the economy that have been weak continued to be weak, notably residential construction, and nonresidential investment in structures and equipment which together knocked $183 billion off GDP and were the biggest negatives.
Residential construction has been so bad over the past year (down 23%) and has reached such a low level (now only 2.6% of GDP) that even if it doesn’t recover soon it will almost certainly stop being a drag.
The second biggest drag on 1Q GDP was a liquidation of non-farm inventories to the extent of $112 billion. This ranked as the second largest negative, and was sufficiently large that it’s unlikely to repeat at anywhere near that magnitude.
Perhaps not “green shoots” as the popular press call them, but a moderation of inventory liquidation, the end of the drop in residential construction, and continued but slower improvement in our trade balance are the best hopes for the next couple of quarters. All in all, the 1Q numbers confirm my opinion that the steepest part of the contraction is behind us. They say nothing, however, about how soon the decline will end, what will propel a recovery, or how much vigor it may or may not have.