Implications: The trade deficit increased in August, resuming the upward trend it's been on since the economic recovery began in mid-2009. The US is sucking in lots of goods from the rest of the world, which supports the case that monetary policy has already accomplished its job of reviving domestic demand. The expansion of the trade deficit subtracted 3.5 percentage points from the growth rate of the economy in the second quarter, the biggest negative trade effect in more than 60 years.
For Q3, trade is likely to be a negative factor again, but not nearly as large. Rather than trying to make monetary policy even more expansionary than it already is, policymakers should be focused on reducing regulations, cutting tax rates, and shrinking government spending (both now and in the future) to incent companies to meet more of revived domestic demand through domestic production. One policy that would accomplish all three goals would be to repeal the health care bill enacted earlier this year.
In other news this morning, new claims for unemployment insurance increased 13,000 last week to 462,000. Continuing claims for regular state benefits dropped 112,000 to 4.40 million, the lowest level in almost two years.
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