The Shrinking Deficit Is No Mirage

 | Jan 02, 2013 | 12:00 PM EST  | Comments
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With so much attention focused on the fiscal cliff, it is easy to ignore or even dismiss other important data that are coming out. Hint: The big picture ain't so bad!

A critical number, released a couple weeks ago by the U.S. Commerce Department, is the current account deficit. It has been shrinking, albeit at a slow pace. But the key here is that it is not growing.

A week before Christmas, the Associated Press reported that in July-September 2012, the U.S. trade deficit fell to its lowest level since the fourth quarter of 2010. What kind of number are we talking about? That is a deficit of $107.5 billion, down 9% from $118.1 billion in the second quarter. Although the improvement is small, it does represent progress. After all, if the U.S. deficit is not rising, something positive is happening with its balance of trade.

This improvement was attributed to a narrower deficit in goods and a slightly larger surplus in services, with the latter owing to U.S.-based financial, insurance, and professional services companies bringing home greater earnings from overseas. The surplus on investment earnings dipped to $50.8 billion from $52.1 billion in the second quarter.

"The narrowing of the deficit in the third quarter left it at a level equivalent to 2.7 percent of the total economy, down from 3 percent in the second quarter," the A.P. reported. "The third-quarter deficit represented the smallest percentage of the economy since the spring of 2009."

While many market watchers are worried that another debt downgrade could be triggered by the government's failure to resolve the fiscal situation, they ignore the positives that are coming from the data. Granted, the fourth quarter of 2012 may come in at only 2.5% GDP growth or even less -- hurt by Hurricane Sandy and also by concerned consumers pulling back. But if or when the budget impasse is resolved, the economy could see a nice growth trajectory, with a smaller deficit and a better-looking balance sheet. If only....

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