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Trade slowdown

As the top chart shows, both exports and imports slowed down in recent months, with exports slowing a bit more than imports. The slowing in exports is confirmed by a more pronounced slowdown in outbound container shipments from the ports of Los Angeles and Long Beach, as shown in the second chart. The result of more imports than exports was a somewhat wider "trade gap," the traditional bugbear of politicians and others who fail to understand how international trade contributes to higher living standards.

Although it's true that a widening gap between imports and exports subtracts from GDP growth, it's not necessarily the case that a trade deficit is a sign of economic weakness. When foreigners sell us more goods and services than we purchase from them, as has been the case for decades, foreigners must at the same time put more money into our stock, bond, and real estate markets than we put in theirs. In other words, a trade deficit must always be matched by a capital account surplus of equal magnitude. The dollars we pay out for foreign goods and services must, at the end of the day, be spent on something here, whether it be a bank deposit, a stock certificate, or a bond. You might say that foreigners are more interested in buying dollar-based financial assets and real estate than they are in buying our goods and services. (I should add that foreigners have traditionally converted a decent portion of their export earnings into $100 bills, which cost us almost nothing to produce.) A trade deficit is not a problem, since it means that foreigners are willing to contribute to our pool of savings by investing in the U.S.

It's entirely possible that the slowdown in exports was a reflection of foreigner's heightened concern over the possibility of a double-dip recession and/or a European banking crisis. Instead of buying more of our goods and services, foreigners wanted to put some extra money into our financial markets for safe-keeping. With markets beginning to feel a bit better about the future, it's also entirely possible that we might see foreigners taking some money out of the bank to buy more of our goods and services in the months to come, thus fueling stronger U.S. export growth.

Whatever the case, the still-strong growth rate of U.S. imports (up at an annualized 12.6% rate in the three months ended in August) reflects healthy demand from U.S. consumers.

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