Friday, September 17, 2010

Payments Deficit

The Lehmann Letter (SM)

In a further endorsement of the economic recovery, yesterday the Commerce Department announced that the U.S. International deficit on current account had risen from $109.2 billion in the first quarter to $123.3 billion in the second quarter:

This may seem paradoxical: How can a growing balance of payments deficit signal a growing economy?

The chart serves to deepen the mystery: Each recession (gray vertical bar) appears to have reduced the deficit (the line climbs back up), while expansions have grown the deficit (the line continues south).

That's because the balance of trade drives our balance of payments. In recession our imports drop because falling incomes reduce expenditures on foreign as well as domestic goods. Consequently our balance of payments improves as we spend less overseas. When economic recovery and expansion bring growing incomes and increased expenditure at home and abroad, our balance of payments deteriorates as we purchase more from the rest of the world.

Current Account

(Click on chart to enlarge.)

Recessions shaded

You can see from the chart that recent developments confirm this. Our balance of payments deficit dropped from over $200 billion per quarter to less than $100 billion in the course of the recent recession. Now the deficit is growing again as the economy and incomes recover and we purchase more from the rest of the world.

The chart also reveals the unmistakable trend over the past quarter century: The long run deterioration in our balance of payments as our purchases from the rest of the world grow. The recent recession provided a brief interruption in a disturbing trend. Now, as the economy gains momentum, you can expect the balance of payments deficit to deteriorate further and reach record levels once again.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2010 Michael B. Lehmann

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