09.03.2013 0

Shrinking imports in Q2 bearish indicator for outlook


By Bill Wilson

In a revised estimate of growth in the second quarter, the Bureau of Economic Analysis now projects that the economy grew by 2.5 percent annualized, not the 1.7 percent previously estimated.

The total revision amounted to $34.5 billion added to the Gross Domestic Product.

However, it was almost entirely on account of adjustments made to the balance of trade, with imports coming in $17.4 billion less than expected, and imports $15 billion more.

Although a narrowing trade deficit sounds positive on the surface, it is often associated with recessions, as was the case in 2001 and 2009, according to data compiled by the Federal Reserve. That is because as imports from overseas dry up, it is an overall indicator of global trade slowing down. This tends to feed back into our own economy.

Likely, the shrinking imports can be attributed to continued stagnation in Europe and a slowdown in emerging economies like China, Brazil, and elsewhere.

In the meantime, personal consumption was revised downward by $400 million, and gross investment was flat, only adjusting upward by $6.1 billion.

In that context, the revised GDP is owed not to better than expected consumption and investment, but simply to trade flows.

Growth in the first quarter was just 1.1 percent annualized, meaning the economy remains at less than 2 percent for the year, contrasting with the White House Office of Management and Budget, which had forecast that GDP for the year would be 2.3 percent. The Fed itself said growth would be anywhere from 2.3 to 3 percent for the year.

Once again, growth is coming in below government expectations. This is nothing new.

In Jan. 2008, the Fed saw no recession or financial crisis on the horizon. It projected between 1.3 to 2.0 percent real growth in 2008, and between 2.1 to 2.7 percent growth in 2009.

Instead, the economy contracted by -0.3 and -3.1 percent in 2008 and 2009, respectively.

By Oct. 2008, as markets were crashing, the bank changed its tune. The economy was slowing down considerably, but likely would not shrink. 2008 would see between 0.0 to 0.3 percent growth, and 2009 between -0.2 to 1.1 percent. Wrong again.

In Jan. 2009, in the midst of severe financial distress, the Fed finally thought a recession would happen, but would be mild, projecting a contraction between -1.3 to -0.5 percent that year. Still way off. Again, in 2009, it went down -3.1 percent.

Similarly, the Fed’s track record in projecting a recovery has been way off. That year, the Fed projected a V-shaped recovery after 2009. The economy would grow between 2.5 and 3.3 percent in 2010, and between 3.8 and 5.0 percent in 2011.

By Jan. 2010, the Fed had changed its expectations slightly for 2010 — by raising them. Then, they said the economy would grow between 2.8 and 3.5 percent in 2010, although they lowered their expectations for 2011 to between 3.4 and 4.5 percent.

Instead the economy only grew by 2.4 percent in 2010, and by 1.8 percent in 2011. Wrong again.

Even as late as June 2011, the Fed was projecting between 2.7 and 2.9 percent growth for 2011. Way off. Again, the economy only grew by 1.8 percent in 2011.

In Jan. 2012, the Fed said the economy would grow between 2.2 and 2.7 percent — just barely meeting its forecast that time when it came in at 2.2 percent for the year. Like the broken clock, it finally got one right.

And maybe it will get its 2013 call right again, but to get to 3 percent growth for the year, the economy would need to grow at 4.2 percent annualized rates in both the third and fourth quarters. Not impossible, but with the economy faltering overseas based on slowing trade, it appears unlikely at best.

Bill Wilson is a member of the board of directors of Americans for Limited Government.

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