Fisher Investments on America’s Record Trade Deficit

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America’s trade deficit hit a record $74.4 billion in March 2021, as US imports swamped exports—and in an odd turn, most observers saw it as a positive sign of strong growth and demand.[i] That is a radical shift from years past, when many feared big trade deficits were huge economic negatives—a sign of weakness. In Fisher Investments’ view, today’s more-optimistic take has it right. America’s trade “deficit” is a byproduct of America’s strength, not a reason to worry.

The word deficit has always had a negative connotation, but semantics isn’t the only driver behind the long-running fear. The theory: Large trade deficits signal the US is living beyond its means, spending more than it earns. Or countries running large trade surpluses with the US, like China, gain an economic advantage, to the detriment of American businesses and workers. But Fisher Investments’ research shows trade deficits—which have existed in the US for more than four decades—aren’t negative.

Rather, trade deficits have accompanied economic growth for decades. The last time America ran a trade surplus was in 1975, after an Arab oil embargo cut exports to the US, a fundamentally negative event. Oil shortages reduced imports, but they also contributed to a deep recession. In early 1992, when monthly data start, the trade deficit was less than $1 billion. From there, it increased dramatically through mid-2006. The trade deficit remained elevated through 2007, too. Yet America’s economy grew throughout this span with the exception of 2001’s brief, shallow recession, when the deficit fell. Through this timeframe, US GDP grew a cumulative 67.2%.[ii]
(Exhibit 1)

Exhibit 1: Rising Trade Deficits Aren’t Recessionary

Source: FactSet, as of 05/11/2021. US monthly trade deficit (billions), January 1992–March 2021. Recession dating from the National Bureau of Economic Research, which hasn’t declared an end to 2020’s recession yet.

Then 2007–2009’s global financial crisis hit. As domestic demand tanked, imports slumped. Exports also fell, but not as much as imports. Hence, the trade deficit fell dramatically—but it wasn’t a positive thing. Not coincidentally, it rose again as GDP began recovering in mid-2009.

Most often, Fisher Investments finds the trade deficit grows when the economy does; it falls during recessions. Last year was an exception because the deficit grew during an economic contraction. One reason: the pandemic’s unique effect on consumer behavior. For example, increased remote working drove demand for imported electronics, while Americans gobbled up personal protective equipment from overseas. In other words: Imports represent domestic demand.

Very few finished goods are produced and sourced wholly in one country. International trade lets a country focus on the goods and services it produces most efficiently. In his 2010 book, Debunkery, Fisher Investments founder and Executive Chairman Ken Fisher explained it simply: You earn income from your specialization of labor at work. That income buys goods and services and, as you spend money for these, you run a deficit with each vendor even as you save and accumulate wealth overall. Similarly, America runs a substantial trade deficit because the country specializes in areas—such as aircraft, entertainment, chemicals, pharmaceuticals and financial services—where it excels. Yet national wealth accumulates because total national income is far, far higher.

Foreign investment also plays a key, underappreciated role here. The trade deficit is a major part of the country’s “current account.” Its counterpart, the “capital account,” measures the flow of foreign capital into and out of a country. Americans’ buying goods and services from overseas creates the trade (and current account) deficit. But that delivers foreigners dollars, which they invest in American assets, one way or another, driving a capital account surplus. In the end, the two accounts cancel each other out, and the deficit is simply one side of a balanced ledger.

So for all the longstanding fears over the trade deficit, history shows it really is just a harmless figure that usually results from economic growth. That pundits see this today, in Fisher Investments’ view, is one more sign investor sentiment is quite optimistic.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[i] Source: FactSet, as of 05/18/2021.
[ii] Source: US Bureau of Economic Analysis, as of 05/14/2021. Cumulative percentage change in US real GDP, Q4 1991–Q4 2007.

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