The real reason US growth was so strong last quarter: the trade deficit narrowed

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GDP tries to measure economic activity within a country. It's a simple formula; government spending + investment (new factories/machines/tech) + household expenditure + exports - imports.

Therefore any spending by govts, business and households on imports is deducted, as that boosts GDP outside the country.

For about thirty years, the US has been running a trade deficit fueled by borrowing. And borrowing is simply future expenditure brought forward.

However, high interest rates have prompted people to cut spending fueled by borrowing. This in turn has resulted in a drop in imports. But exports stayed steady as the world still buys American tech they can't get anywhere else.

Here's the chart:


source

The uptick in the red line is the narrowing trade deficit. As long as interest rates remain high, consumers will continue to cut expenditure on imported goods.



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