Soaring Net Exports Lead to 1.9 Percent Growth in Second Quarter

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July 31, 2008 (GDP Byte)

Soaring Net Exports Lead to 1.9 Percent Growth in Second Quarter

GDP Byte by Dean Baker

For Immediate Release: July 31, 2008
Contact: Alan Barber, (202) 293-5380 x115

"Revised data show the economy contracted in the 4th quarter of 2007."

Rising exports and plunging imports kept GDP growth in positive territory in the second quarter, as the collapse of the housing market continues to be a large drag on growth. Exports grew at a 9.2 percent annual rate. More importantly, imports fell at a 6.6 percent annual rate. Together, the change in net exports added 2.42 percentage points to GDP growth for the quarter, keeping the growth rate in positive territory.

The impact of the foreign sector on the economy in the last three quarters has been extraordinary. Gross domestic purchases, the sum of consumption, investment, and government expenditures, have actually been falling at a 0.5 percent annual rate since the third quarter of 2007. In other words, without the improvement in the trade balance, the economy clearly would be in a recession.

It is worth noting that the reduction in the trade deficit is only on the real side. The nominal deficit trade deficit actually grew slightly in the second quarter to $737.3 billion (5.2 percent of GDP). The reason for the rise in the nominal deficit was an extraordinary 28.6 percent jump in import prices. While higher oil prices are the most important factor in this increase, prices of all imports are rising rapidly. The price of imported services rose at a 16.2 percent annual rate in the quarter. The dollar will have to fall much further to bring the trade deficit down to a sustainable level.

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