Discounting the Trade Deficit

Today, the Census Bureau released trade figures for the month of November. The deficit grew to $47.752 billion in November, up from $43.271 billion in October and much larger than the consensus expectation of $44.0 billion. A larger deficit is a subtraction from GDP, but a larger deficit does not necessarily mean the economy is in trouble. For example, the deficit would increase if the increase in imports is greater than the increase in exports. Yet if both are increasing, the economy could be doing fine. Unfortunately, that wasn't the case in this report. The report showed that imports increased by $2.947 billion in November while exports decreased by $1.535 billion.

The good news is that the report tells us what happened two months ago. As a result, it may not be giving us a good indication of what is happening now. Other economic figures indicate that the economy is improving. Nonfarm payrolls, housing starts, and consumer sentiment are moving in the right direction. While today's trade report is not consistent with an improving economy, we shouldn't put too much weight on it.