We get a flood of new data on the state of the economy this week, including the latest imprint on an important but oft-ignored driver of the economy – global trade.
Here are three reasons why global trade matters for Main Street.
Trade feeds economic growth
Generally, we direct most of our attention to consumers and their spending habits because – no mystery here – consumers make up the bulk of the U.S. economy.
But people forget that trade between countries affects what people buy and how much things cost.
Like most wealthy nations, the U.S. imports more than it exports. The difference between what we sell and what we buy is called the trade balance.
A negative balance is a trade deficit, meaning the U.S. imports more – buys more – than it exports – sells – to other countries. The U.S. has carried a trade deficit since the 1970s.
That’s not as bad as it sounds. In a growing economy, imports allow Main Streeters to consume more by adding to domestic production. The U.S. economy has rebounded quickly from the pandemic relative to the rest of the world, and that has widened our trade deficit.
Last week, we saw that the trade deficit in February held at a record high of $89 billion for the second month.
Trade affects inflation
The headliner for the big data week ahead will be a fresh read on inflation, which currently sits at a 40-year high.
Trade has played a big role in that story. The upheaval in global supply chains has been a critical contributor to the higher prices now plaguing us. The inability to source and move materials and goods has led to periodic shortages and long wait times.
Those disruptions are easing, but slowly, which means prices continue to rise at an accelerated pace.
Trade makes companies more productive and efficient, which can help keep inflation under control. The pandemic taught the world what happens when that system is disrupted. It even taught the experts a thing or two about the importance of reliable supply chains when it comes to inflation.
For those in need of a reminder, the Federal Reserve has two jobs. One is to keep prices from getting out of whack. The second is making sure that everyone who wants a job can get one.
The central bank has mostly accomplished the latter. But price stability has suffered during the pandemic. What the Fed initially diagnosed as a temporary price jump due to pandemic-driven supply chain bottlenecks now looks more durable and long-lasting.
And the crisis in the Ukraine has thrown up new barriers to trade that could be particularly harmful for global food and energy prices.
Trade resilience is the future
After plummeting more than 20 percent in the early days of the pandemic, global trade is now above pre-pandemic levels, according to the World Trade Organization.
But that’s not the whole story. The pandemic has left a permanent mark and exposed an urgent need for a more resilient supply chain, even if it costs more.
Before the pandemic, many of us lived blissfully unaware of the risks inherent in low-cost, imported goods. On-demand consumerism and just-in-time inventories couldn’t exist without cheap, fast options for delivering goods and services.
And cheap and fast sometimes means relying on a single supplier or sourcing from a single region – perhaps in another country far from where the final product is sold.
Supply chains are now a front-burner issue for manufacturers and service providers. Look for two paths forward: Diversified supply chains that draw on numerous sources for inputs, or more domestic production and sourcing, known as onshoring.
Either path will likely make goods and services more expensive. But both also will lower risks. And a transformation toward efficiency and resilience will help the U.S. economy continue to grow.
As economic data pours in this week, economists will be looking for hints of an economic slowdown or worse, a recession. Right now, through the lens of the real economy, a recession still seems unlikely. Consumer spending is holding up in the face of higher prices. Job gains continue to be robust, openings plentiful, and layoffs rare.
Inflation has replaced labor market woes as the biggest risk to continued economic strength. Rapid price growth threatens to unwind our hard-fought productivity gains, which have helped fuel long-term growth.
The Fed, for all of its power, can’t eliminate supply bottlenecks. But by making it more expensive to borrow, it can put the brakes on spending. That can buy companies time to heal their supply chains and catch up with consumer demand.
Trade policy won’t be the focal point of this week’s economic news, but trade’s ability to support and accelerate economic activity is as important to managing inflation as monetary policy.
Footnote: Retail sales will be a strong closer to this data-driven week, giving us a check on the consumer.