Are declining capital imports growth rates an indicator of recession?
The January trade figures are in; the trade deficit was slightly smaller — at $59.1 billion — than the
consensus of $59.8 billion. The improvement in the trade balance ex. oil imports was even more marked, as shown
in Figure 1. In other words, this month’s worth of data largely reinforces the trends discussed in my previous post on this
subject. So in many respects, I think this was good news to the extent that a smaller deficit places us less at the whims of foreign investors and central banks. (Coverage by Bloomberg and Reuters.)
Figure 1: Trade Balance (blue) and trade balance ex.-oil (red) and Bloomberg Consensus (green), in millions of dollars per month, seasonally adjusted. Source: BEA/Census March 9th trade release; Bloomberg.com, and author’s calculations.
However, the trend in the trade balance depends on both exports and imports. Real goods export growth in the past two months has been only about 7.2% y/y, down from earlier months. Moreover, on the import side, we know that imports are a function of at least two factors: income and the real exchange rate.
So to the extent that aggregate demand might be slowing, the improving trade balance might be
a manifestation of inventory adjustment (see Haver’s discussion, which is related to Econbrowser reader spencer‘s comments in this post), or — more troubling — a harbinger of slower growth or even recession. This possibility inspired me to look at the forward looking components of import demand — namely capital goods imports (which in turn are linked to equipment investment growth that leads GDP growth). The two year growth rate (in log terms) of capital imports, while still a healthy eight+ percent, is declining (see Figure 2). In real terms, the growth rate is slightly higher.
Figure 2: Two year annualized growth rate for nominal capital goods imports (blue) and real capital goods imports(red) Source: BEA/Census March 9th trade release; and BLS import/export price release of February, and author’s calculations.
An examination of the historical record — displayed in Figure 3 — is suggestive. Over the past 30 odd years, when the annualized two year growth rate of capital goods imports declines to 10 percent (log terms) or below, the U.S. economy is either about to go into recession, or already in one.
Figure 3: Two year annualized growth rate in real non-petroleum goods imports (blue) and capital goods imports (red). NBER recession dates shaded gray. Source: BEA February 28 NIPA release, NBER, and author’s calculations.
There are a couple of exceptions. In 1986, two-year-growth declines below 10 percent, but no recession occurs. In 1980, the economy goes into recession, yet two year growth at the beginning of the recession is above 20 percent. Hence, this indicator yields both false positives and false negatives. Furthermore, it’s not a leading indicator. Rather it seems to correlate with recessions. Food for thought as concern about recession rises.
Figure 4: Count of posts including the word “recession” in all languages, on all blogs “with some authority”. Source: Technorati.