The Trade Deficit Rises

From Goldman Sachs (Hatzius, et al.) today, interpreting today’s July trade release:

The trade deficit rose to $50.1bn in July, from a revised $45.7bn in June. Total exports fell 1.0%, as the total drop in exports ($2.1bn) was comprised primarily of declines in civilian aircraft ($1.6bn) and soybeans ($0.7bn). The decline in soybeans exports likely reflects payback following a sharp increase in June ahead of Chinese retaliatory tariffs. Total imports (+0.9%) rose, reflecting increases in both petroleum imports (+3.7%) as well as nonpetroleum imports (+0.6%).

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The Investment Boom…or Not

Fixed nonresidential investment is rising at a rapid clip. However, there are some nuances to the headline story.


Figure 1: Nonresidential fixed investment, in billions of Ch.2012$ (blue), and in billions of dollars (red), both SAAR, both on log-scale. Source: BEA, 2018Q2 2nd release.

Some sizable portion of recent investment is associated with the mining/drilling/fracking phenomenon.


Figure 2: Contributions to overall nonresidential fixed investment growth of structures investment in mining (red), and all else (blue). Source: BEA, 2018Q2 2nd release, and author’s calculations.

For the moment, investment looks like it should be sustained. However, should oil prices decline, or the spigot of cash diminish (see McLean/NYT today), then the support coming from this sector might disappear. (This article discusses light tight oil (LTO) sector cash flow, financing, and prospective capital investment.)

In addition, investment in equipment, while rising overall, is declining in the industrial sector.


Figure 3: Contributions to overall equipment investment growth of industrial equipment investment (red), and all else (blue). Source: BEA, 2018Q2 2nd release, and author’s calculations.

Right now, increased investment demand coming from the accelerator is more than offsetting the drag coming from higher policy uncertainty. As the effects of the tax cuts wear off, we should expect the balance to shift.

Guest Contribution: “The Next Recession Could Be a Bad One”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. This column is based on “The Next Economic Crisis,” remarks on a panel at the 2nd annual retreat of the American Enterprise Institute in Jackson Hole, Wyoming, August 13. A shorter version appeared in Project Syndicate.

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At the Current Pace, the 2-10 Will Invert in December

Holding to the Old Faith


Figure 1: Ten year-3 month Treasury yield spread (bold dark blue), and ten year-two year Treasury yield spread (bold dark red), and projections at current pace using 2017M01-18M08 sample (light blue and pink lines), in percentage points. August 2018 observation through August 27th. NBER defined recession dates shaded gray. Light orange denotes Trump administration. Source: Federal Reserve Board via FRED, Bloomberg, NBER, author’s calculations.
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