Stronger imports, a good sign for Q4 NGDP

You may have seen headlines on Tuesday, about how US imports for October jumped to “record highs”. For the month of October, nominal US imports increased to $45.2 billion, seasonally adjusted, up 5.8% year-over-year.

The financial press are keen to write about trade reports, but almost without exception miss the implications of a widening or narrowing US trade deficit. The financial press, even prestigious outlets with expensive subscription fees, will claim that greater imports mean lower GDP. Witness, the Wall Street Journal on December 5th:

“The U.S. trade deficit widened in October largely because of a slowdown in exports and an increase in imports of oil and other foreign goods, which could drag down the country’s growth at the end of 2017.” (emphasis added)

The facts are that a widening trade deficit, or more importantly, rising US imports, is associated with greater nominal GDP growth.

The chart below shows the association between imports and nominal GDP, comparing quarterly growth rates. The correlation is 0.58, which is quite high, and rises to 0.76 when we look at year-over-year growth rates (not plotted).

While it’s true that in an accounting sense, imports subtract from GDP, in an empirical sense, more imports, at least in the US, usually come along with more GDP. This makes sense when you think about it.

In a complicated, globalized economy, almost all spending stimulates be it on domestic goods or imports.  If one buys a computer or a car, many parts will be sourced abroad, even if the unit itself was assembled in the US. The strong read for October imports, is thus an indication that the propensity to spend money was in some way accelerating.

This is just one monthly report. A small indication that Q4 NGDP could be tracking to come in better than expected. The important point is to remember that when analyzing the US economy, stronger imports usually mean stronger NGDP. We should have a better sense of how the quarter is looking toward the end of December, when we get retail sales, industrial production and personal income numbers for November.

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