Conclusion: In the charts below, we highlight the fairly symbiotic relationship between U.S. import demand and headline economic growth, as well as what that means for the 1Q12 GDP report.
On the heels of a narrowing of the Trade Deficit to $46.0 billion in FEB (vs. $52.5B prior and a Bloomberg Consensus estimate of $51.8B), a rather large sell-side firm came out an increased their 1Q12 U.S. Real GDP growth forecast, citing the both the sequential improvement in the Trade Balance and the pickup in Export growth, which accelerated in FEB to +9.3% YoY vs. +7.8% prior.
While that firm has developed a history over the years taking the other side of a few of our more contrarian calls, their maneuver today does make sense intuitively to us. After all, GDP = C + I + G + NX, where “NX” is the Net Export/Trade Balance figure. In theory, a narrowing of a country’s trade deficit is explicitly supportive of a higher gross domestic product reading in the period.
In actually (i.e. according to the data), the U.S. Trade Balance actually has an inverse correlation to U.S. Real GDP growth. Keynesians want us to believe that “export boosting” currency devaluation policies are the elixir to all of our economic woes, but the fact of the matter is that the best Net Export reading the U.S. has posted over the last ten years came during the thralls of the Great Recession (JUN ’09).
The issue with debasing your currency and stoking cost-push inflation ('08; '11; '12) is that it slows the growth rate of end demand for goods in both the household and corporate sectors. At this point, it’s far beyond trivial to remind readers that the U.S. economy is levered to the “C” in the aforementioned equation. That domestic demand/GDP relationship is highlighted in today’s Balance of Payments report, with U.S. Import demand slowing to +6.9% YoY. Over the past 18yrs of data, the quarterly YoY growth rate of U.S. Imports has carried a +73% correlation to the quarterly growth rate of U.S. Real GDP.
Net-net-net-net-net, don’t be surprised if our call on JAN 25 for Bernanke’s Inflation to Slow Growth continues to show up in the data as we continue to expect it to.