Did trade deficit cause slow growth in 2016, as Donald Trump tweeted?

In an early-morning tweet, President Donald Trump took a not-so-veiled shot at his predecessor’s economic record.

"The U.S. recorded its slowest economic growth in five years (2016). GDP up only 1.6%. Trade deficits hurt the economy very badly," Trump tweeted on April 26, 2017:

We’ll look at the gross domestic product number first, then look at whether there is any linkage between a large trade deficit and weak economic growth.

Slow GDP growth

To check the growth in gross domestic product, we turned to the official data from the U.S. Bureau of Economic Analysis.

Specifically, we looked at the year-over-year increase in inflation-adjusted gross domestic product. According to the final revision released on March 30, inflation-adjusted GDP increased by 1.6 percent between 2015 and 2016.

How does that compare to previous years? As Trump said in his tweet, it is the lowest annual increase since the change between 2010 and 2011, when the year-to-year increase was also 1.6 percent. Here’s the annual change in GDP going back to 2000:

We should note, as we typically do with statements like this, that no president deserves full credit or blame for economic performance on their watch, because no president is powerful enough to singlehandedly shape the economy. Other forces, from technological advances to developments overseas, can have significant effects.

Also, reasonable people can disagree about how good or bad 1.6 percent annual growth is. An advanced industrialized nation like the United States is not going to see high annual growth rates typical of developing countries.

When the GDP numbers were announced in January, Beata Caranci, chief economist at TD Economics, told the Washington Post, "I know most people say ‘Oh, 2 percent isn’t that great,’ but in the current world it is. Many countries would be envious."

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What impact from the trade deficit?

Contrary to the implication of Trump’s tweet, there is little direct relationship between a big trade deficit and weak GDP growth, at least for the situation the United States is in now.

Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, took issue with Trump’s implication, saying that a trade deficit is mainly a reflection of underlying patterns of savings and consumption in the economy.

For instance, she said, following a tax cut, the economy may be stimulated and the dollar will often become stronger relative to other currencies. That makes U.S. imports more expensive and imports cheaper. So Americans with newly flush wallets would tend to purchase more imports and fewer domestic goods than they ordinarily would, thus increasing the trade deficit.

If the economy is operating below capacity -- generally defined as high unemployment -- then policies to reduce the trade deficit would tend to increase domestic production and employment, helping the economy, said I. M. 'Mac' Destler, a professor of public policy at the University of Maryland and author of the book, American Trade Politics.

But if the United States is not in a below-capacity situation -- and it is not currently -- "then reducing the trade deficit, with increased demand for U.S. production, would lead to overheating the economy, inflation, and not much improvement in net welfare for Americans," Destler said.

We will also note that Trump’s linkage between a high trade deficit and low GDP growth is undercut by recent data. The reality is that the United States’ trade deficit has been substantial for years, through periods of both faster and slower GDP growth. Here’s a chart showing the size of the annual trade deficit going back to 2000, the same period covered by the chart of GDP growth above.

If anything, pairing the two charts shows that two of the years with a relatively small trade deficit -- 2001 and 2009 -- were two of the three weakest years for GDP growth during that time span.

"The United States has had persistent trade deficits since the early 1980s," de Bolle said. "Between then and now, we've had recessions, and episodes of higher growth, all of them accompanied by trade/current account deficits. There is absolutely nothing to suggest that trade deficits led to weak GDP growth in 2016, based on historical data."

Our ruling

Trump said, "The U.S. recorded its slowest economic growth in five years (2016). GDP up only 1.6%. Trade deficits hurt the economy very badly."

Trump is right that GDP growth was slower in 2016 than in any year since 2011. But there’s little evidence to suggest that growth was sluggish in 2016 because of the trade deficit. A sizable trade deficit has been a fact of life for at least two decades, including years of both faster and slower economic growth. If anything, two recent years of smaller trade deficits actually coincided with weak economic growth.

We rate his statement Mostly False.

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2017-04-27 19:20:43 UTC

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Mostly False

"The U.S. recorded its slowest economic growth in five years (2016). GDP up only 1.6%. Trade deficits hurt the economy very badly."

Donald Trump

President

a tweet

Wednesday, April 26, 2017

2017-04-26

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