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The Trade Report Paradox

Tuesday’s trade report was good news for the economy and bad news for the most widely followed measure of economic growth.

Welcome to the wild world of GDP accounting.

First the numbers: The U.S. trade deficit narrowed in March, to $40.4 billion from $41.9 billion in February, the Commerce Department said. Imports and exports both posted strong increases.

As a measure of economic health, Tuesday’s report is good news. Rising exports are a clear economic positive: American companies are selling more of their products to customers around the world. Rising imports are more ambiguous: Over the long term, relying too heavily on products from overseas can be problematic. But in the short term, imports are basically an indicator of consumer demand: If Americans are buying more stuff from overseas, they’re probably buying more stuff made at home, too. Consumer spending accounts for more than two-thirds of economic output, so anything that’s good for consumption is good for growth.

The trade report wasn’t such good news for gross domestic product, however. Most economists responded to Tuesday’s data by downgrading their estimates of first-quarter GDP growth. There’s now a good chance that GDP actually shrank in the first three months of the year. (We’ll get revised data at the end of the month.)

Saying that something is good news for the economy and bad news for GDP may sound like a paradox. After all, economics journalists (me included) often describe GDP as “economic output” or even “the economy.” But that’s shorthand. What GDP actually measures is the value of all the goods and services produced in the U.S. Imports, by definition, aren’t produced here, so they aren’t a part of GDP. In fact, since we have to send money out of the country to buy them, imports count as a negative as far as GDP is concerned.

There’s one other twist. When the Bureau of Economic Analysis released its preliminary estimate of first-quarter GDP growth last month, it didn’t yet have trade data for March. So government economists took their best guess: They estimated the trade deficit shrank from $62 billion in February to $59 billion in March. Those estimates turned out to be a bit optimistic. (At least based on Tuesday’s figures, which are themselves subject to revision.)

None of this should be surprising. As we’ve noted before, preliminary GDP estimates are notoriously unreliable. And in the real world, there isn’t much difference between very slow growth and very slight contraction. The real significance of Tuesday’s report isn’t what it says about first-quarter growth but what it says about the underlying health of the economy. By that measure, at least, it’s good news.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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