This morning’s downward revision of 2nd quarter GDP numbers by the BEA is a shock, but not a surprise. Almost everyone expected such a revision given the recent bad trade numbers. In fact, some expected worse (see stories in the Washington Post, New York Times, Wall Street Journal). If the economy is not doing as well as we had thought due to an increasing trade deficit, this begs two questions:
1) how do we get better data on trade sooner?
2) what do we do about the trade deficit?
On the first question, the fact that trade data is a month behind means that our first look at the GDP will always be subject to potentially major revisions – especially in a time of volatility. As I’ve state before, we still have a lot of work to do to improve the numbers (see earlier posting). In the meantime, we should remember that the data always contains an element of uncertain and should be treated accordingly.
On the trade deficit itself, that will take more work. Part of our problem is that we have gotten ourselves into a structural problem. As we put in place policies to increase consumer spending, much of that spending is on things that we don’t make in the US any more. Hence more consumer spending in the US drives greater imports. On the flipside, as other nations put in place policies to increase consumer spending, the production to meet that demand no longer necessarily takes place within the US. So increased consumer demand abroad does not translated into greater exports. A quote in a recent Washington Post story on trade illustrates the latter point:
Officials at Cummins Inc., an Indiana-based maker of engines and power systems, say that business is booming in such places as China and India but that new orders for its equipment are being met largely at its factories abroad.
“Almost everything we sell in China is made in China, and those factories are at capacity right now,” spokesman Mark Land said. “The strength in those markets helps us overall, but our manufacturing capacity creates a limited need to export.”
Globalization has already occurred. We cannot assume that simply stimulating demand either domestically or globally will stimulate US production. Increasing our exports as well as decreasing our imports will take a coherent strategy — a manufacturing strategy.
As my many postings on the intangible trade data shows, trade in intangibles is only a small part of our trade. We cannot just relying on exports of intangible (a flawed strategy that some advocate). We need to utilize our intangible assets to transform and revigorate all parts of our economy — including manufacturing. Only when we understand the power of intangibles for increasing innovation and productivity — and apply that power to our own economy — will we be able to reach sustainable economic growth.