Trade Winds Blow the Slowdown Simpletons Off Course

Focusing on final domestic demand leads to the right conclusion.
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Knowing Me Knowing You

JACKSON HOLE, Wyo. -- Trade

numbers for February were released on Tuesday.

The table above highlights two facts.

  • The U.S. export positions with North America (Canada and Mexico) and Western Europe both show a notable two-year deterioration and the position with South America has deteriorated markedly over the past year.
  • The U.S. export position with the Pacific Rim deteriorated markedly between February 1997 and May 1998 but has reversed since.

Two points here.

The first is that record trade deficits have not kept the economy from growing quite nicely thankyouverymuch. Exports? We don't need no stinking exports. Keep in mind that they account for just 11.3% of

gross domestic product

. Our net export position has subtracted more and more from growth during the past three years -- 0.19 percentage point in 1996, 0.27 percentage point in 1997, and 1.13 percentage points in 1998 -- and last year GDP still grew more than it has during any year since 1984.

So, when you hear slowdown simpletons screaming that improvement in the Pac Rim trade export position will not be enough to offset deterioration with the rest of the world (see the regional weights in the table), you know how to respond.

So what?

The second point is that trade can be deceiving. Because the deficit rose so sharply during the first two months of the year, for example, it will end up subtracting roughly 3 percentage points from the first-quarter growth rate. So the GDP increase will print not between 6% and 7% as it did during the fourth quarter (when the trade position was roughly unchanged), but rather between 3% and 4%.

But listen. It is unwise to look at a first-quarter growth rate of 3%-4% against a fourth-quarter growth rate of 6%-7% and conclude that the economy is slowing. Why? Because that ain't what the


doing. The Fed focuses on final domestic demand, which equals personal consumption expenditure plus investment plus government spending. Final domestic demand -- this is also known as

final sales to domestic purchasers

and can be found in

Table 1 of the GDP release -- rose 6% during the fourth quarter, and the first quarter will reveal an identical increase.

Final domestic demand was not slowing as April began.

The Fed knows it. You should too.

Side Dish

Best pea?