The U.S. Current Account, the Dollar, and Real GDP Growth
September 19, 2017
The U.S. current account deficit, the broadest measure of net foreign demand, has been manageable in size and comparatively steady relative to GDP in the years since the Great Recession. The current account comprises trade in goods and services, net investment income, and transfer payments. As a percentage of nominal GDP, the deficit equaled 2.4% in 2015 and 2016, and 2.5% in the first half of this year. In 2009 when the U.S. economy emerged from the Great Recession, it equaled 2.6%. Then deficits of 2.9% of GDP were recorded in both 2010 and 2011, followed by 2.6% in 2012, and 2.1% in both 2012 and 2013.
The current account deficit now of 2.5-2.6% of GDP matches the average size during the eight years through 2016 but is only half as much as the relative size during the prior six years through 2008, which was 5.1% overall. A deficit of 4.5% of GDP in 2003 ballooned to 5.1% in 2004, 5.7% in 2005 and 5.8% in 2006 before easing back to 4.9% in 2007 and 4.6% of GDP in 2008.
President Trump has put the goal of slashing America’s current account deficit at the center of his strategy to accelerate overall U.S. economic growth. The current account constitutes one of several components of gross national product, along with consumer spending, business capital spending, public sector expenditures and the change in inventories. But the current account per se is not a barometer of overall economic growth. As its name implies, the balance of payments (BOP), which accounts for all transactions between America and the rest of the world using double-entry bookkeeping, needs to zero out. A deficit in the current account portion of the BOP merely reflect a net inflow or surplus in net financial transactions, and this inflow confirms foreign confidence in the U.S. economy and in turns helps stimulate growth.
From an overall GDP standpoint the dynamism of two-way trade flows, that is good expansion of both exports and imports, exerts greater influence than the net current account. In the three straight years of 2004 through 2006, when the current account deficit exceeded 5.0% each time, real GDP advanced at a per annum pace of 3.25% versus 2.0% per annum in 2009-16, when the deficit averaged 2.5% per year. If acted upon, President Trump’s inclination toward protectionism is ironically likely to depress economic growth by suppressing both imports and exports.
A more covert form of protectionism than the imposition of tariffs and other barriers to imports can be implemented by manipulating the dollar. However, recent swings in the dollar have been less extreme than ones earlier in the era of floating dollar rates. The Federal Reserve compiles a trade-weighted dollar index against other major currencies whose values are market-determined. The index had a value of 108.19 on average in January 1973, fell to 92.02 in October 1978, recovered to 143.53 in February 1985, slumped to 80.34 in April 1995, but then soared to 112.2 on average in February 2002. These swings occurred in spite of occasional massive foreign exchange intervention by officials to resist market forces.
Currency market intervention, direct government purchases of one currency against another to counter market tendencies, now happens very seldom. Yet in post-Great Recession years, monthly averages of the trade-weighted dollar have been confined between 69.10 in June 2011 and 95.43 last December. The index last Friday was 86.61, not far from an average of 89.84 in August 2016. Inflation and interest rate differentials between major industrial economies are not as wide as such used to be, and as noted at the start of this update, the U.S. current account deficit in recent times has been manageable in size and not very volatile from year to year. Trump’s stress on the trade balance would have been more timely years ago than now.
Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: U.S. current account
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