I follow the news, some would say obsessively. I know there are far more important things afoot than backward looking analysis of the United States’ 2016 economic performance.
But I do think in some ways the U.S. was lucky not to have slowed more in 2016.
Why? Because import growth stalled, and imports did not subtract as much from U.S. growth as normally would be expected (and yes, that obviously wasn’t the dominant narrative of the 2016 election).
Plus the U.S. essentially got a small GDP boost as a result of a bad harvest in Brazil that raised U.S. soybeans exports in q3 (a rise that was only partially reversed in q4). The U.S. isn’t (yet) a commodity-driven economy, but it also isn’t (yet) a robot-based intellectual property rights (IPR) royalty-driven economy totally divorced from natural sources of economic volatility.
Imports are essentially a function of domestic demand growth and the exchange rate. More domestic demand than the exchange rate: the exchange rate in nearly all careful studies tends to have a stronger impact on U.S. exports than on U.S. imports. In the Fed’s U.S. international transactions model, for example: “The equations for goods and services exports predict that a 10 percent appreciation of the real dollar would reduce the level of overall real exports by about 7 percent after three years. After three years, the model predicts that real imports would be almost 4 percent higher.”
Over the last twenty years the negative contribution of imports to growth—think of it as U.S. demand that is shared with the world—has been about 25 percent of U.S. domestic demand growth. So typically 75 percent of any increase in U.S. demand goes toward domestic output, and 25 percent goes to the rest of the world (the U.S. of course also benefits from demand growth elsewhere, as growth outside the U.S. pulls up exports).
That is somewhat higher than that import share of GDP—as one would expect, if, over time, the import share of GDP is rising.
But something strange happened in 2016. From mid-2015 to mid-2016 (I like to look at the change over four quarters, a typical year-over-year comparison is the average over the last four quarters versus the average over the preceding four quarters so it uses eight quarters of data rather than four) U.S. imports were essentially flat (the negative contribution over four quarters was only 5-10 basis points of GDP) while U.S. demand growth—even counting inventories—contributed 1.5 to 2 percentage points to GDP growth.