Commentary: How the Shale Boom Has Been Keeping the U.S. Afloat: Justin Fox

The U.S. current account deficit grew a bit at the end of last year, to $128.2 billion in the fourth quarter from $101.5 billion in the third quarter, according to data released March 21st by the Bureau of Economic Analysis. That amounts to 2.6 percent of gross domestic product, which from the perspective of the past 15 years or so isn’t all that big.

The current account balance is the sum of the balances in goods and services and in primary and secondary income flows. Primary income is earned by U.S. individuals and businesses on investments outside the country; secondary income is current transfers such as the remittances sent by workers in the U.S. to relatives in other countries. It’s the goods trade balance that gets the most attention in political discussion, and for good reason — it’s been pretty much the sole driver of the big increase in the current account deficit since the early 1980s.

The reasons for this great widening of the trade deficit have of course been much debated over the past three to four decades. In politics, most of the attention has been on tariffs and other trade barriers, which President Donald Trump appears to be making the top priority of his second year in office. Among economists, the focus is entirely different. This is from Federal Reserve and Treasury Department veteran Joseph E. Gagnon, now a senior fellow at the Peterson Institute of International Economics:

A country can have a trade deficit only if it is borrowing on net from the rest of the world. Trade barriers have only minor effects on borrowing and lending decisions. They can reduce imports in affected industries, but they cause the exchange rate to appreciate to bring about offsetting changes in other imports and exports.

Some observers paint this borrowing as a positive thing driven by confidence in the U.S. economy, or at least in the ability of the U.S. Treasury to manufacture safe assets. Others portray it as a sign of weakness driven by chronic federal budget deficits or currency manipulation by foreign governments. I’m really not sure which of these is right — maybe all of them are! — but they all would seem to indicate that, especially with the budget deficit likely to rise sharply because of tax cuts and spending increases approved by Congress, the president’s saber rattling on trade won’t actually reduce the trade deficit.One thing that’s important to remember, though, is that economists’ models of the world are always incomplete. For example, why is the goods trade deficit so much smaller now than it was a decade ago? Well, it may be partly a loss of confidence in the ability of U.S. banks to manufacture safe assets out of dodgy mortgage loans. But it’s got to be mainly about oil — with natural gas starting to play a role since Cheniere Energy Inc. started exporting it from its terminal in Louisiana last year.

The U.S. trade deficit in goods that aren’t oil and gas is now bigger than ever, both in dollar terms and as a share of GDP. But the oil and gas trade balance, which was 4.1 percent of GDP in the fourth quarter of 2004, is rapidly nearing zero, and all indications are that it will turn positive soon. None of this means that raising tariffs and provoking trade wars is necessarily a good idea. It does seem to be an indication, though, that explaining trade deficits purely in terms of borrowing by the U.S. or purchasing of U.S. assets by foreigners (which is the same thing but, as noted, different people like to give different emphases) provides an incomplete picture. The ability of U.S. producers to supply an in-demand product at lower prices than other producers — in this case enabled by the technical advances and investments needed to extract oil and gas from shale — matters, too.From a U.S. financial and government policy perspective, this shale boom has provided a welcome respite from the wildly imbalanced conditions that helped bring on the financial crisis in 2008. It has enabled the government to run bigger fiscal deficits with less financial stress than would probably otherwise have been possible, and it may have helped keep private-sector borrowing in check after years of rapid increase. It made Barack Obama’s job easier, and it’s making Donald Trump’s job easier. It may have longer-term consequences for the environment and other industries that aren’t so great. But for now, it’s hard to shake the impression that it’s what’s keeping the U.S. economy afloat.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.