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Trade Deficit Expected to Rise, Overwhelms Effects of Stimulus

Prof. Peter Morici - 6/12/2009

Wednesday, the Commerce Department report will report April international trade in goods and services. The U.S. trade deficit on goods and services is expected to rise to $28.7 billion from $27.6 billion in March. My forecast is $29.9 billion.

Trade with China and oil imports comprise more than 90 percent of the deficit. The deficit with China is expected to increase as consumer spending recovers, but the oil import bill is expected to rise on higher prices.

At 2.5 percent of GDP, the trade deficit subtracts more from the demand for U.S. goods and services than President Obama’s stimulus package adds. Moreover, the lift from the Obama stimulus is temporary, whereas the drag from the trade deficit is permanent.

In 2009 the trade deficit is slicing $400 billion to $600 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost 5.3 million jobs since 2000. Following the pattern of past economic expansions, the manufacturing sector should have regained about 2.7 million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing during the expansion.

Lost growth is cumulative. Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10000 per worker.