The housing boom is the result of a combination of historically low mortgage rates and a cyclical surge in real wage and salary income in late 1998 and early 1999, both of which have now subsided. The gap results both from an acceleration in imports and a falloff in export growth. This dramatic deterioration is due to the rising deficits for industrial supplies, autos, and consumer goods. These products are all intensely price competitive and are therefore sensitive to the value of the dollar or changes in relative cost advantages among countries. In other words, the wedge in terms of foreign productive capacity that was so beneficial to both the U.S. and the rest of the world in 1998 and 1999 is here to stay.
Global trade provides U.S. consumers and business with low-priced and often specialized goods.
However, a larger share of the income earned from a growing U.S. market is now earned abroad. The trade deficit is an important pressure valve when interest rates are low and growth is accelerating, but can be a drag when interest rates are rising and growth is stabilizing.