Over the past three quarters a rapid improvement in the trade deficit has more than offset a slumping domestic economy and kept overall GDP growing at a 1.3% annual pace. There was no recession in heavily export dependent industries, such as electronics, aircraft and off road vehicles or in regions of the country dominated by export industries.

The decline in the domestic economy resulted from the collapse of the housing market, aggravated by the worldwide surge in commodity prices, especially oil.  Both of these restraints on domestic spending are now ebbing and will exert progressively less restraint in the coming quarters.

The turnabout, already beginning, will be in the form of improved confidence and expanded purchasing power from initially less inflation and eventually more jobs. The last Conference Board Consumer Confidence Index survey, taken in mid- August reported a five point increase to 56.9, including a pickup in future expectations while the assessment of current economic conditions continue to worsen.  Since then, oil prices have dropped more than $10.00/bbl. Further gains in consumer confidence are ahead. Business spending confidence is largely derived from how consumers’ feel about the economy.

Although oil prices have dropped $40 from $147 to $107/bbl., there were few transactions at either extreme.  A $20 decline will yield about a 2% rise in the growth of real consumer income and more than 0.5% in growth pace of the domestic economy. If oil prices hold, this impact will be fully in place by the 4th quarter.

At the same time, the rapid improvement in the US foreign trade balance is ebbing from the record change in the 2nd quarter when exports expanded at a 13% annual pace and imports fell at an 8% annual pace.  This is unlikely to be repeated although the change in the trade balance will add to total GDP growth for at least several more quarters. The now appreciating $US and slower growth in the rest of the world will progressively reduce the positive impact of trade on US GDP growth.

The overall economy is almost certain to slow from the 3.3% GDP growth in the 2nd quarter – likely to be revised up further to over 3.5%.  Another slightly negative GDP quarterly growth rates is possible through next winter.  Nonetheless, the decline in the domestic economy is ending about now with modest, about 1%, growth expected in the next few quarters and faster growth in 2009. This will cause the now 28 month fall in construction spending to end even if overall GDFP growth weakens.

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