Terms Of Trade Strikes Back?
This, and also the fact that nominal national income has usually increased a lot slower than nominal GDP, suggests that economic growth was likely a lot weaker than the headline number. Now during the third quarter this distortion will likely be temporarily ended. The reason is that terms of trade is highly correlated with the oil price, and since that has fallen significantly recently, terms of trade might temporarily start to strengthen for the U.S. By looking at the import and export price news release, it is clear that although terms of trade in the first month of Q3, July was weaker than 3 months earlier, it was stronger in August than in May. And the June to September change is likely to be far stronger, meaning that there is a high probability that terms of trade will actually strengthen in Q3, although not by much.
The bad news for the U.S. economy is that underlying economic growth hasn't strengthened, and so the implication of the stronger terms of trade is instead that the headline number will be a lot weaker. Negative volume growth therefore seems almost certain for Q3.