It was widely reported that the trade deficit shrank in February. This is true when the deficit is measured in nominal dollars. It declined by $0.5 billion from $58.9 billion in January to $58.4 billion in February. The nominal measure is the key number in assessing how much the country is currently borrowing from abroad. However, this decline in the reported deficit was entirely due to lower import prices (primarily oil). The deficit measured in real terms was approximately $0.4 billion higher in February than January. In fact, for the first two months of the current quarter, the annualized trade deficit is approximately $12 billion higher (in 2000 dollars) than it was in the fourth quarter. This is why it is inaccurate to assert, as did the NYT headline, that "Sales Abroad Propping Up the Economy." In the fourth quarter of 2006 the decline in the trade deficit added 1.6 percentage points to reported GDP growth. If the March deficit is in line with the January and February data, the rising trade deficit will subtract approximately 0.4 percentage points from first quarter growth.
--Dean Baker
