Trade Data Adds Some Lumps to the Economy

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We got new trade data this month for June. I'm here with Bob Johnson--he is our director of economic analysis--to see what impact this will have on GDP, and what it's telling us about the global economy. Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: Why should we care about this import/export data? How big of a factor is it in evaluating the strength of the U.S. economy?

Johnson: I think it's very important because exports now run about 13.5% of GDP. Keep in mind that as recently as the 1960s exports were only 5% of the U.S. economy. Then it waffled between the 60s and the 90s, where it got eventually up to about 9% of GDP. Then from about 2000 on, we've been on a tear. We've moved from about 9% of the economy based on exports to this 13.5% that we're at now. I will say, over the last two or three years--that being 2012-14--the number has been relatively stable at about 13.5%.

Glaser: What was the data this week?

Johnson: Data we got this week was the import/export data, and the trade deficit came down from about $45 billion to about $41 billion. The number had trended a little bit higher than I would have liked to have seen, but this month it looked a little bit better. Certainly, part of the reason they expanded is because, with the very cold winter we had, we were keeping more of the oil and gas products for ourselves. So, there were fewer exports. And then from our friends in Canada and Mexico, we were importing more oil-related products. So, that temporarily slowed some of the improvement and made trade kind of a drag on some of the GDP numbers.

Glaser: What was driving the decrease? Was it exports? Was it imports?

Johnson: On a month-to-month basis, basically exports were flat. There was no growth, and we saw about a $2.9 billion decrease in imports. So, what we're bringing in from other countries slowed a bit in June, which is not good news for our trading partners who are dependent on us.

Glaser: This trade data has been a big swing factor in the GDP calculations. What do the June results tell you about any revision to the second quarter, and maybe how it effects your expectations for the rest of the year?

Johnson: That's a great question because the GDP number has been all over the place recently, and the leading cause has been the export data as well as inventory data. It has made it very hard to interpret the report. Recall that it added 1.1% to GDP in the fourth quarter and then turned around and took off 1.7% in the first quarter. Probably, the reality was between those two numbers, but that number has been swinging so wildly lately that it has really impacted the numbers.

The good news is that in the second quarter it was a 0.7% detraction from the economy, and now with the data that we have for June--which was better than the forecasters at the [U.S. Bureau of Economic Analysis] were thinking--it now looks like it will be only a 0.5% or less detraction from GDP. So, our GDP number will be a little bit higher in the second quarter on the next go-around, if this was the only change.

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Glaser: Let's look at those import numbers that you mentioned were actually down quite a bit. What does that mean for the rest of the global economy? Is that a sign of weakness outside of the United States?

Johnson: I think that we had a couple of pretty good months of imports, and then this month was a little bit disappointing--at least to our import partners. It's not good because a lot of countries are depending on U.S. economic growth and strength to pull their economies up. It's probably not great news to see the import data slump a little bit in June. But recall--we did have a relatively good April and May as we bounced back from the bad weather. So, this import/export data has been badly impacted by the weather, and now I'm hoping the numbers begin to normalize a little bit.

Glaser: A region where there has been concern about growth, of course, is Europe. Did we see anything in this data that makes you think that Europe is weaker or any other data this week that points to a weaker Europe?

Johnson: I'm a little bit concerned about Europe right now. It kind of looked like it was coming out of its slump. It's been out of recession since last June, but we really haven't seen much growth. Now, the data looks like, overall in Europe, that the growth rate in the second quarter will be slower than in the first. And in fact, if you look at some of the individual economies, the situation may be even a little worse.

We got data out of Italy this week, which showed that Italy has now had two down quarters again of GDP growth--probably indicating they're back in recession again. So, that's certainly not good news. Some of the German production numbers looked off a little bit again. And European inflation came in at 0.4%. That's not for one month; that's year-over-year. And that's down from 0.5% the previous reading, and it's also considerably lower than the U.S. number of around 2% as well as the European Central Bank target of 2%. 

Clearly, something is a little bit wrong in Europe. Certainly, part of it probably has to do with Russia and the threat of sanctions and some slowing that we're already seeing in Russia beginning to affect the European community. Certainly, that's bad news for them.

Glaser: If we do see a slump in Europe, what impact will that have on the U.S. economy?

Johnson: It probably won't be a huge impact. Europe, as an area, is certainly one of our bigger trading partners, but it's still only 2% to 3% of our GDP. So, it's not a huge number. And a lot of that turns out to be soybeans, airplanes, and things related to oil products. There are things that are locked in longer contracts and/or have a different dynamic that's driving them, so I'm really thinking that a slump in Europe isn't going to have a huge impact on the U.S. other than maybe keeping our interest rates lower for a little bit longer.

Glaser: Bob, I certainly appreciate your take on this data today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.