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Three views of the U.S. trade deficit Minding units and considering services

Consider the graph above, which shows the U.S. trade balance. It looks like things are seriously heading south, with a deficit that’s ten times larger than it was 25 years ago. Is it really that bad? For one thing, the economy as a whole has grown significantly over this period, and prices have increased, too. To address these biases, we should divide the trade balance by our favorite nominal index, nominal GDP. The result is the graph below.

Now that the units are percentages of GDP, we can see that the deficit is five times as large as it was 25 years ago, not ten times. And it has actually improved since the previous recession, to a little more than three times its size, topping out at –4% of GDP. But wait, there’s more: International trade doesn’t pertain to goods alone; it also involves services. And here, the United States actually enjoys a surplus. So, if you redo the second graph with the trade balance for goods and services, you obtain the graph below:

Finally, we see that the current trade deficit is at about 3% of GDP. Is that a lot? Actually, a deficit isn’t necessarily bad. See a previous blog post on the topic.

How these graphs were created: For the first graph, simply search for “trade balance” and take the series that pertains only to goods. For the second graph, use the first and then go to the “Edit Graph” panel: From there, add “nominal GDP” and apply the formula a/b/10*12. (The idea is to divide by 1,000 to put both series into the same units and then multiply by 100 to obtain results in percentages, which reduces to simply dividing by 10. Multiplying by 12 changes the trade balance’s monthly frequency to an annual frequency, to match nominal GDP’s annual frequency.) For the the third graph, replace the trade balance for goods with the trade balance for goods and services.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: BOPGSTB, BOPGTB, GDP

A 30-year growth spurt? The proportion of total output contributed by nonprofits has risen consistently, even during recessions

The nonprofit sector in the U.S. has grown substantially in recent years. A survey from the National Center for Science and Engineering Statistics found that, from 1997 to 2007, nonprofit revenue grew 33% faster than overall U.S. GDP. The Bureau of Economic Analysis defines nonprofits as tax-exempt institutions, specifically those serving households in 5 major categories: religious and welfare organizations, medical care, education and research, recreation, and personal business associations. The graph above shows that the share of the nonprofit sector in GDP has indeed increased. The interesting part is that it has increased every year, especially in recession years.

The scatter plot above confirms this: By putting the share of GDP on the vertical axis and the index of recession probability on the horizontal axis, we obtain a point for every year in the sample. The points tend to follow a positive slope, which indicates that this grows more when there’s a higher likelihood of recession. In fact, the sector has proven to be quite resilient: According to the Bureau of Labor Statistics, nonprofit employment increased 8.5% from 2007 to 2012, growing every year during the Great Recession. Nonprofits also employ 1 in 10 U.S. workers, and the proportion is likely to grow, given current trends. So, why does nonprofits’ share of GDP increase more significantly in recessions? The answer likely has to do with disproportionate growth of nonprofits and disproportionate lack of growth in other sectors.

Nonprofits promote the public good. So, during economic downturns, they may have greater opportunity to increase their output. In fact, nonprofits can play a central role in economic recovery, for example, by directly remediating problems associated with recessions (such as unemployment) through welfare spending and expanding economic opportunities through education. On the other hand, other sectors of the economy experience disproportionate decreases in growth compared with nonprofits. Durable goods manufacturing and construction industries accounted for more than 28% of GDP in the second quarter of 2007; two years later, they accounted for less than 22%. As other components of GDP shrink, the nonprofit output tends to rise.

How these graphs were created: Search for “gross output nonprofits” and select the relevant series. In the “Edit Graph” tab, search for “nominal GDP” and select the not seasonally adjusted series. Click “Add.” In the formula tab, type (a/b)*100 to yield the percentage. To transform the first graph into the second, change the units to “percent change.” Select “Add Line” and search for “recession indicator” and add it to the graph. Change its frequency to “Annual” with the default averaging. In the format tab, change the graph type to “Scatter.”

Suggested by Maria Hyrc and Christian Zimmermann.

View on FRED, series used in this post: DNPERC1A027NBEA, GDPA, JHGDPBRINDX

Moderately well understood The Great Moderation is evident, but its causes are complex

For decades, economists have puzzled over the reduction in macroeconomic volatility in the U.S. and world economies after the mid-1980s: In the last 25 years or so of the 20th century (highlighted by the blue bar in the graph), domestic output, employment, and inflation all fluctuated far less than they had in prior years. The data make the stabilization of the economy clear, yet economists haven’t reached consensus over the causes or duration of the Great Moderation.

The Federal Reserve points to monetary policy as a primary cause of the moderation, through orderly responses to inflation and GDP changes after the Great Inflation of the 1980s. Instead of waiting for the signs of economic recession or rising inflation to appear before acting, as was common in the “go-stop” practices of the 1960s and 1970s, the Federal Reserve began following a more systematic, rules-based approach. Another proposed cause is the structural change of the economy and the labor market. In the 1980s, labor patterns shifted away from manufacturing and toward less-volatile sectors. Also, new technology sped up communication and allowed producers to track inventory and demand more easily, leading to more stable output over time.

It’s easy to look to clear economic and policy changes as contributors to the Great Moderation, but there may be another factor at play: luck. Statistical models such as those proposed by Stock and Watson or Galí and Gambetti assert that, although some economic shocks did occur during the early part of the Great Moderation, they were less severe and better handled than those of the 1970s. While others dispute this claim, it still brings to mind the question: If luck is responsible, how long will it last?

There’s no answer yet to the question of whether the Great Moderation ended with the recession of 2007-09 or was merely temporarily disrupted by it. If we assume that structural and policy changes brought about the reduction in volatility, then, as long as those are maintained, the moderation ought to continue. However, if good fortune is responsible, we may still be waiting for the next shock that will bring about another increase in instability.

How this graph was created: Search “Real GDP” and select the relevant series. From the “Edit Graph” tab, click “Add Line” and select “Create use-defined line.” Set the date range from 1983 to 2017 and set both the start and end points as zero.

Suggested by Maria Hyrc and Christian Zimmermann.

View on FRED, series used in this post: A191RL1Q225SBEA

Treasuring cash Why does the U.S. Treasury have so much cash at the Fed?

The graph above shows the operational account that the U.S. Department of the Treasury has with the Federal Reserve. This account is basically equivalent to the checking accounts individuals and businesses have with their banks. Indeed, the Federal Reserve acts as the U.S. government’s bank. And this account has plenty of funds to take care of expected cash payments, check clearing, and outstanding wires. In general, though, it’s a good idea to prevent an account balance from getting too large. The balance could be used to reduce debt or be spent on goods and services instead of earning very little interest. Yet, this account has had substantial balances since 2008, and they keep getting larger. Why?

The answer has to do with the Treasury’s response to the financial crisis of 2008. The Treasury assisted the Fed with the Supplementary Financing Program (SFP). In September 2008, the Treasury began issuing short-term debt and placing the proceeds at the Fed. This helped offset the large balances that other banks were holding at the Fed. The SFP has been empty since July 2011; yet, there are still large cash holdings to this date. There are two reasons for this: First, late in 2008 the Treasury suspended its cash reinvestment program. It used to make short-term loans to banks that needed liquidity. Given low interest rates and the fact that banks have been holding excess reserves, this program hasn’t been necessary, and so the Treasury is holding more cash. Second, since late 2015 the Treasury has been purposefully holding more cash to be prepared for any major disruptions, such as a potential cyber event or a systemic event like the crisis in 2008.

How this graph was created: Search FRED for “Deposits with Federal Reserve” and add the series to the graph.

Suggested by Glen Owens and Christian Zimmermann.

View on FRED, series used in this post: WTREGEN

How Y=C+I+G has evolved 70 years of quarterly national account data

FRED now has 70 years of quarterly national accounts data for the United States, which is an opportunity to look back at how the U.S. economy may have changed since 1947. In the graph above, we look at the three main expenditure components of real gross national product: real consumption, real investment, and real government expenses. They’re normalized to 100 for the first quarter of 1947, to make them more comparable.

The first thing to note is that these aggregates are now a multiple of what they were in 1947. Part of the growth comes from population growth and increases in labor force participation of women, but the majority is from productivity increases as a result of technological progress and new management and distribution techniques. Second, investment fluctuates wildly, which is no surprise to anyone who has studied economic fluctuations. Third, investment’s trend is steeper than consumption’s, while government expenses have increased markedly less since the 1990s. (Note: This does not include expenses related to redistribution.)

How this graph was created: Start at the real domestic product release. Check the three series, then click “Add to Graph.” From the “Edit Graph” tab, change units to “Index” with the date set at 1947-01-01, and click “Copy to all.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: GCEC1, GPDIC1, PCECC96


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