CHART OF THE DAY: Some Bad Economic News That Everyone Is Mistaking For Good

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Today the February trade balance came in narrower than expected.

Specifically, the trade balance was -$46 billion vs. estimates of -$51.8 billion.

This is being called good news because the trade deficit is subtracted from GDP. Therefore, technically Q1 GDP will be higher than previously thought.

And as such, various banks are now cranking up their Q1 GDP estimates. Yay! Markets higher!

But it’s not actually good news!

Despite the fact that the trade deficit comes out of GDP, it turns out historically that larger trade deficits coincide with bigger GDP gains, and vice versa.

The below chart nicely shows what we’re talking about.

The red line is the year over year change in the trade deficit. When the red line drops a lot it theoretically means that the trade deficit is improving, but what it means is that the trade deficit shrunk a lot from that same period the year before.

The blue line is the year-over-year percentage change in GDP.

The pattern is not hard to see. The more the trade deficit shrinks, the worse it is for GDP.

chart of the day, gdp vs trade deficit, april 2012

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