A turn for the worse
Further signs that the recovery is weakening
Aug 19th 2010 | WASHINGTON, DC
NO SOONER have Americans come to terms with their second-quarter economic slowdown than economists have started warning that the news is worse than they first let on. Output growth slowed to an annualised rate of 2.4%, according to the government’s initial estimate, down from a 3.7% rate during the first quarter. Among the chief culprits was a widening trade gap. Imports grew nearly three times as fast as exports for the period, producing a bigger drag on output. As Christina Romer, the outgoing head of Barack Obama’s Council of Economic Advisers, lamented, “A bit of you keeps saying that if only those were American products, think of how high GDP growth would have been.”
That difference between what could be and what is continues to grow. On August 11th the Census Bureau reported a nearly $8 billion increase in the trade deficit between May and June. Imports rose by $6 billion while exports declined, leading to a $50 billion monthly trade gap: the largest since 2008. Economists estimated that this new data could trim nearly half a percentage point off second-quarter growth.
Taken together with new inventory and construction data, this means that the second-quarter growth figure may turn out to have been just 1.2%, rather than the first estimate of 2.4%. And it may be even worse; one Barclays analyst thinks the actual figure could be as low as 0.3%. Forecasts for the rest of the year are also being nudged down as a result. Macroeconomic Advisers adjusted its expected third-quarter growth rate to 2.4% from 3% after the trade data appeared. A double dip into renewed recession still looks unlikely (the chances are perhaps 25-30%, according to a Goldman Sachs estimate), but a slowdown in growth to near 1% is closer to contraction than most would like.
The new numbers mean that frustration with China is only likely to intensify as unemployment remains stubbornly close to 10%. America’s bilateral trade deficit with China grew by nearly $4 billion from May to June, while China’s July trade surplus swelled to $28.7 billion—the highest level for 18 months. Meanwhile, China’s currency spent the following week falling against the dollar, giving back much of the ground the yuan had gained since China, under intense pressure from America, allowed it to rise.
With an election looming and the recovery looking pallid, politicians may grasp for whatever villains are available. Chuck Schumer, a Democratic senator from New York, continues to push legislation that would force the Treasury to declare China a currency manipulator, subject to punitive tariffs. Mr Schumer and the Senate majority leader, Harry Reid, have both expressed a desire to put a bill onto the legislative calendar for September, when Congress returns. Mr Obama has so far been unwilling to support such measures, but his resolve may hinge on the mood of the electorate. Without a fall in unemployment, it will continue to sour.