by Calculated Risk on 11/16/2008 02:46:00 PM

From Dr. Setser: Ut-oh …. exports are starting to fall fast.

[T]he non-petrol goods deficit is now moving in the wrong direction. It increased from $29.3b in June to $35.6b in August. Non-petrol exports fell by $9.9b over the last two months, while non-petrol imports fell by “only” $3.7 billion.
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And remember this is the September data. Since then the global outlook has deteriorated — and the dollar has strengthened substantially. That isn’t going to help US exports.

Although Brad Setser is concerned about the global impact of slowing U.S. exports, I think there is another interesting relationship: net exports vs. residential investment. Let me add a couple of graphs ...

Click on graph for larger image in new window.

The first graph shows real residential investment (from the BEA) and real net exports. These are historically countercyclical; as residential investment increases the trade deficit tends to increase, and as residential investment falls, the trade deficit declines.

The second graph shows this as a contribution to GDP (rolling 4 quarters to smooth the data).

This shows that residential investment and net exports are countercyclical and tend to offset each other somewhat as far the impact on GDP. This is important because slowing exports could mean that there is nothing to offset a further decline in residential investment.

The good news is the trade deficit will decline sharply over the next few months (because of the decline in oil prices), and residential investment might bottom sometime in the next few quarters.

The bad news is the trade deficit might start increasing again - after the oil price adjustment - because of the stronger dollar and weak global economies. And residential investment might bottom, but any recovery will probably be anemic because of the huge overhang of surplus inventory. So it is unlikely that residential investment will offset any possible rise in the trade deficit.

Just something to add to Setser's post ...