The US trade figures for Q4 2012 came out this morning and they surprised analysts by showing a trade deficit that shrank 21% to $38.5 billion in December. According to Bloomberg News this was a lower deficit than any of 73 economists estimated prior to the release.
For me the significance of this report is that it means that the 0.1% contraction in GDP for Q4 2012 will likely be revised up to an increase in GDP when figures are revised next month. And while the trade figures were flattered in large part due to a surge in petroleum exports and a decline in petroleum imports, the eventual adjustment to GDP underlines the fact that the US economy, independent of wrangling over fiscal policy is in the midst of a sustainable cyclical recovery. There is no reason to believe this recovery would turn to recession at this juncture in the absence of federal budget cuts or tax increases.
The latest update on the federal budget sequester is that it still looks likely that the sequester will happen as I have been predicting for some time. The real question is whether the cuts in the budget will be enough to cause the economy to dip into recession. Of all of the items on the US federal fiscal agenda between the fiscal cliff and the sequester, the payroll tax increase will have the largest drag on GDP growth [Content protected for Gold members only]