U.S. GDP Growth Masks Biggest Decline in Imports Since 2009

(Bloomberg) --

President Donald Trump has staked his re-election campaign on a U.S. economy that in his telling has become a “roaring geyser of opportunity.” Thursday’s latest growth data, however, showed that geyser may be partly an optical illusion.

The biggest contributor to the 2.1% annualized pace of growth recorded in the fourth quarter of last year was 1.5 percentage points from net exports, almost all of which came from the biggest slump in imports seen since the Great Recession of 2009.

For a president who was elected in 2016 promising to decrease the trade deficit, its contraction in 2019 is proof his tariffs and other trade policies are working to rebalance the U.S. economic relationship with the world.

The problem economists see is that the outsize role of the slump in imports and its contribution to higher gross domestic product reflects the sometimes illusory role trade plays in GDP calculations rather than any real strength in the economy. That is because the decline in imports appears to have had more to do with weakening U.S. domestic demand and business investment than anything else.

The figures give “the optical illusion of an economy chugging along” while “the composition of growth reveals a softer picture,” said Greg Daco, an economist at Oxford Economics. An 8.7% drop in imports and its effect on GDP meant “net trade represented the largest optical illusion in the GDP report.”

The value of goods entering U.S. ports and border crossings in the fourth quarter stood at an annualized $2.86 trillion, the smallest since the third quarter of 2017.

Some of that was a reflection of growing U.S. energy production. Imports in the fourth quarter included the smallest value of inbound petroleum and products in 18 years. But the decrease in imports was also more broad-based. The values of inbound shipments of capital goods, autos and consumer goods were all lower in the fourth quarter.

The decline in imports is at least partly due to the tariffs Trump has imposed on goods from China. But the scope of the slump is also too big to be only about tariffs, said Brad Setser, a former U.S. Treasury economist now at the Council on Foreign Relations.

Trade with other large trading partners like Mexico has been affected too, he said. “That clearly reflects a broader downturn in demand for the U.S. economy.”

Any contraction in the trade deficit, in other words, has had more to do with slowing U.S. demand than a surge in exports. For the year, exports of goods were down 0.2%, the figures showed.

That slump in demand points to what businesses and economists say have been the broader effects of Trump’s trade wars and the business uncertainty they have caused.

Investment Recession

The GDP report included more evidence that the U.S. was plagued by an investment recession as well as a manufacturing one last year. Gross private domestic investment fell 1.9% in the fourth quarter from a year earlier, while investment in non-residential structures fell 7% and equipment was down 1.5%.

Kevin Cummins, senior U.S. economist at NatWest Markets, said the slump in imports also appeared to reflect weaker consumer demand, one of the big drivers of the U.S. economy traditionally. “If consumption is weakening, you’re going to have weaker imports, which ironically, should be a net positive for top-line GDP,” he said. “But I think it’s a sign of weaker consumer demand more than anything else.”

Some economists argue that Trump’s signing of a “phase-one” deal should lift the real economy in 2020, just as it has financial markets. That agreement, though, has left tariffs in place on $370 billion in imports from China that are still likely to be a drag on growth and even the Federal Reserve is holding off judgment.

U.S. Federal Reserve Chairman Jerome Powell on Wednesday warned that “trade policy uncertainty remains elevated” and that his conversations with contacts in the business world showed they were still adopting a “wait and see attitude”.

Other close observers of the U.S. economy also still think that Trump’s trade policies will be a drag on growth this year. In forecasts released this week, the Congressional Budget Office said it expected the tariffs on China and other trading partners introduced by the Trump administration to take 0.5% off growth in 2020.

--With assistance from Vince Golle.

To contact the reporters on this story: Shawn Donnan in Washington at sdonnan@bloomberg.net;Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Ana Monteiro

©2020 Bloomberg L.P.