The U.S. Trade Deficit and the “New Economy”

September/October 1999
Federal Reserve Bank OF St. Louis: The U.S. Trade Deficit and the “New Economy”

The performance of the U.S. economy during the 1990s has been universally hailed as stellar. Economic growth has been strong, unemployment has reached its lowest rate in over a generation, and inflation has remained relatively low.

The 2000s? Not so much.

In both the media and popular opinion, trade deficits often are portrayed negatively, being blamed on the unfair trading practices of our trading partners or on a lack of U.S. competitiveness in world markets.

Score one for the media and popular opinion!

Simple logic suggests that the downward trend established during the 1990s cannot be maintained indefinitely—if it were to do so, the United States would ultimately exceed its ability to pay for the rising tide of imports.

Score one for simple logic!

This article has described the basic determinants of the current account, challenging the common, but simple notion that trade deficits are inherently bad.

Score one for common simple notions!

The resulting weakness of the U.S. current account balance is, therefore, a reflection of an economy that is strong, but in transition. A turnaround of the deficit is likely to be an important indicator of when that transition is complete.


The red dot represents the annual trade deficit at the time of the article.

The "turnaround of the deficit" was certainly an important indicator of something. It turned around just before our Great Recession. Score one for the St. Louis Fed! Hurray!

Only after we reach this more mature phase of the current economic expansion will we be able to fully evaluate the claims of those who suggest that we are on the threshold of a new economy in which rising rates of productivity and economic growth will last far into the future.

We are definitely on the threshold of something right now. If 11 years of massive trade deficits, 11 years of miserable job creation, 11 years of massive debt creation, 11 years of horrendous stock market performance, and 11 years of pension funds being overly optimistic about future returns are any indicator, then I'd claim we're standing on the edge of a cliff. Just a hunch.

September 5, 2010
July's trade balance data may unravel mystery

The June report seemed to ask more questions than it answered. For one thing, the surge in imports didn't square with the sense that the economy had hit a soft patch and consumers were reluctant to spend money.

Another puzzle was that the imports didn't seem to show up anywhere. At least they were not where they would typically be found: either in inventory data if they ended up on store shelves, or in the sales reports.

In other words, imports, like a missing sock between the washer and the dryer, have simply disappeared.

For what it is worth, I think our entire economy is lost between the washer and the dryer. It's been a lost sock decade.