Trade is keeping the Economy in the Black

By August 1, 2008Economy, General, Trade

The Commerce Department reported yesterday that the gross domestic product (GDP) increased by 1.9 percent in the second quarter. While this improvement from the 0.9 percent rise in the first quarter was, in part, due to the stimulus checks that propped up consumer spending, the fact remains that even if consumer spending was flat the economy still would have grown.

How, you may ask, could the economy still have increased in Q2 if consumer spending (which accounts for 70 percent of the economy) didn’t grow, especially given the fact that gross private domestic investment (housing, capital investment and inventories) fell by 15 percent (annual rate) in the second quarter?

The one word answer to this question is: Trade.

That’s right. Trade, the proverbial whipping boy of those who believe that American manufacturers (who are the most productive workers in the world) cannot compete in the global market, is keeping the economy in the black.

By itself, trade (exports-imports) contributed 2.42 percentage points to GDP growth in the second quarter-the largest contribution to GDP growth from trade in 28 years (3rd quarter of 1980.) In fact, trade’s positive contribution to economic growth last quarter was roughly 4 times the magnitude as the negative impact from the decline in residential investment.

Over the past year, trade accounted for fully 83 percent of the increase in our nation’s economy. During the last economic downturn in 2001, an overvalued dollar and sluggish growth abroad formed a toxic combination that constrained trade’s ability to act as a counterweight to a recession in the domestic economy. The result was a very dramatic downturn for manufacturers. Thankfully, that toxic combo has turned into a cocktail for growth. Today, growth from trade is offsetting the softness in the domestic economy. The result is a slowdown, but not a recession, thanks to trade.

Hopefully, policy makers on Capital Hill will muster the political courage (economically it’s a no-brainer) to vote on the pending free trade agreements (Colombia, Panama and South Korea) awaiting congressional approval. Lowering barriers to trade increases U.S. manufacturers’ ability to sell more products to customers abroad. Yesterday’s GDP report shows how important this is, especially when the domestic economy is going through a soft patch.

Leave a Reply