Recall that GDP is the sum of spending on private consumption, private investment, government consumption and investment, and net exports.
The November trade report came out today, and suggests that Q4 net exports will improve about $50 billion (at quarterly rates).
How big is $50 billion? Well, GDP for 2008 Q3 was about $3600 trillion. Forecasters have been saying that GDP will fall at a 5 percent annual rate, which means that it will fall 5/4 of a percent from Q3 to Q4. 0.05*3600/4 = $45 billion.
Yes, you read that correctly -- the change in net exports (in the direction of raising GDP) is as large as the declines that the forecasters think they see.
We need to be careful because, in principle, an increase in net exports could just reflect a reduction in consumption (and thereby no change in the sum of consumption and net exports). This quarter, much of the trade deficit improvement is reduced oil imports. However, that is not a reduction in real consumption but rather a reflection of improved terms of trade (oil prices have dropped a lot more than the prices of goods we export).
We need to be careful because, in principle, an increase in net exports could just reflect a reduction in consumption (and thereby no change in the sum of consumption and net exports). This quarter, much of the trade deficit improvement is reduced oil imports. However, that is not a reduction in real consumption but rather a reflection of improved terms of trade (oil prices have dropped a lot more than the prices of goods we export).
I will soon finish my spending-based and income-based real GDP growth forecasts. I explained earlier that my employment based forecast is -2.5% (at annual rates). I expect the spending-based forecast to be at least as optimistic, and the income-based forecast to be the most optimistic of the three.
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