The Trade Gap May Be Inflated
Unsustainable trends, the late economist Herbert Stein wryly observed, simply do not last. And the unsustainable trend currently stirring a heated debate in economic circles is the nation's record trade gap, which, along with a net outflow of investment income, pushed the current-account deficit last quarter to 4.2% of gross domestic product--its highest level in at least 120 years.
Like many of his colleagues, economist Ian Morris of HSBC Securities Inc. views this figure with some trepidation. Sometime within the next year or two, he warns, foreign investors worried about America's growing indebtedness may start pulling money out of the U.S. That in turn could touch off a "vicious spiral" as a plunging dollar roils the markets and forces the Federal Reserve to step hard on the monetary brakes, imperiling the long expansion.
Consultant L. Douglas Lee of Economics from Washington Inc. thinks this danger is exaggerated, however. And his reason isn't simply the common view that foreigners know they are helping to finance America's high-tech boom and thus enhancing the nation's ability to service its foreign debt. Rather, he argues, the trade deficit itself is overstated.
Lee points to anomalies in economic data that have cropped up in recent years. The first is a gap between the two ways the nation's output is measured: via spending on final product and via income flows. While the product accounts are viewed as more reliable and are used in calculating GDP, the income accounts usually track them closely. Since the start of 1997, however, a large "statistical discrepancy" has opened between the two measures, with the income data showing significantly faster growth.
Commerce Dept. officials have speculated that this gap may reflect an undercounting of exports. Indeed, a 1997 Census Bureau study estimated that U.S. merchandise exports could be understated by as much as 10%, or $60 billion. One reason is that more and more small businesses and small-volume shippers have become exporters in recent years, and data reporting for these companies is skimpy. As Lee notes: "Amazon.com may export millions of dollars worth of books each year, but it faces no reporting requirements as long as each package is valued under $2,500."
Another anomaly, says Lee, is the divergence between the current-account deficit (mainly reflecting trade data) and the savings deficit, which is the amount by which domestic savings falls short of domestic investment. By definition, the two should be mirror images, but in recent years, the savings deficit has been about 40% smaller (chart).
In short, Lee thinks faulty measurement of U.S. exports has resulted in significantly overstated trade and current-account deficits. If he's right, it would not only help explain the dollar's persistent strength but would also give a lift to recent productivity and output data. And it would lessen the chances of capital flight that some fear could eventually derail the expansion.