$845 billion.[i] That huge number was the US’s trade deficit last year—the world’s largest. Many believe that massive trade deficit is a drag on economic growth—and, hence, stocks. However, Fisher Investments’ reviews of market and economic history show trade deficits are a flawed, meaningless statistic and often stem from economic strength. They aren’t a reason to worry, in our view.
Trade deficit worries usually hinge on the notion America importing goods is bad for US growth, as if America relies on exporting countries for certain goods—or that those imported goods may compete with US-made ones. And because GDP calculations subtract imports from exports, it might seem like they do hurt growth. But Fisher Investments’ reviews show these are flawed ways to view imports. GDP subtracts imports because they are tallied elsewhere in consumption figures, effectively canceling their effect on the statistic. This, of course, misses a key point: Imports are actually a positive in the private sector.
Fisher Investments knows that it’s important to understand GDP isn’t synonymous with “the economy.” It is simply an attempt to tally a single country’s output. That is why the calculation nullifies imports’ effect. But when Americans continually snap up goods or services—no matter where they are produced—it is generally a good sign of robust domestic demand. It may be easier to envision this if you think of the US as a corporation: If sales boom at a large retailer that sells imported goods, that likely drives imports up. Would that be bad for the retailer… or good? Imports also reflect foreign investment, another positive for growth. Investment inflows match trade outflows—meaning US dollars earned by foreign traders are necessarily invested back into the US. Rising imports can signal increased foreign demand to invest in the US, helping fuel American innovation and growth.
Fisher Investments’ reviews of both stock returns and economic data also support the notion trade deficits don’t imperil America’s economy. The US has consistently run a trade deficit since 1976, peaking at 6.3% of GDP in 2005 and hitting 4% in the most recent quarter.[ii] Since this streak of deficits began, US stocks have risen 3,905%.[iii] There have been cycles, of course, but the trade deficit usually shrinks in bear markets. Why? Bear markets typically precede recessions, or periods of contracting economic output. Exhibit 1 shows this. Consider the steep fall in the trade deficit during 2007 – 2009’s financial crisis. The deficit also dipped during 2000, a bear market year ahead of 2001’s mild recession. Why? Economic contractions often drive down demand and spending for discretionary goods, which are often imported. Thus, overall sales of imported goods slow during recessions. Seeing this, businesses want to avoid sunk costs and idle inventories, so they cut imports. And because imports are larger than exports, when demand declines in America, the trade deficit is somewhat biased to shrink.
It also works the other way around during economic expansions. When growth delivers consumers more money to spend, demand rises and imports increase. Again, look to Exhibit 1. Note that in the go-go 1990s and the early 2000s expansion, the deficit got bigger. In the 2009 – 2020 expansion, it wobbled some in each direction, largely influenced by oil and commodity prices, according to Fisher Investments’ review of data and history in that timeframe.
Exhibit 1: Monthly US Trade Deficit and Recessions
Now, in 2020, the story is more complex because of the downturn’s bizarre nature. Fisher Investments notes that the trade deficit itself barely shows any influence from weakening demand driven by COVID lockdowns. But under the hood, imports tumbled -20.3% between January and May while exports fell an even sharper -29.5%.[iv] From there, though, growth resumed sharply—driven largely by goods demand due to continued interruptions to the services industry and the need for imported personal protective equipment. This caused the trade deficit to grow quickly in late 2020 and into 2021 amid a fast-recovering economy. Since then, economic reopening has shifted demand toward services and the goods-driven trade deficit is down.
In our view, the trade deficit is a misnomer and rather meaningless statistic. We think total trade—exports plus imports—is a better metric of economic activity because it doesn’t stigmatize imports—and rightly so. Imagine purposely cutting vital imports like cars, computers or oil. Would the economy be better or worse off? Looking back, the 1970s’ oil embargo proved poor for the economy, precisely because the US couldn’t import enough oil. Total trade represents the volume of international business transactions, much more important for growth. When Americans sell more? Great. When they buy more? Great, too. Thus, when Fisher Investments reviews trade, we chiefly consider America’s robust total trade rather than its trivial trade deficit. We think you should, too.
Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated herein. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
Sources:
[i] Source: FactSet, as of 10/10/2022.
[ii] Source: US Department of Commerce, as of 9/22/2022.
[iii] Source: Ibid. S&P 500 Total Return, 12/31/1975 - 10/10/2022.
[iv] Source: FactSet, as of 10/17/2022.