(LifeWire) - The US economy is a huge, ever-changing organism. So how can economists and investors get a fix on how it compares with the rest of the world and where it might be headed?
Economists closely watch three trends, the current account deficit, the trade deficit and the budget deficit, because these three indicators may tell us a lot about the future of the dollar and of the economy as a whole.
The Current Account
The current account is simply a measure of how much money is flowing out of the country compared with how much is flowing in from foreign sources.
It is figured by adding the balance of trade (the value of what we sell overseas minus what we buy from overseas) to net income from abroad (the difference in what we receive in dividend and interest payments minus what we pay out), and adding to this net unilateral transfers, such as foreign aid.
The largest component of the current account calculation is generally the balance of trade. If a country buys significantly more goods from overseas than it sells, its current account is likely to run a deficit.
It was rare for the US to run a current account deficit before the 1970s, according to tables kept by the Federal Bureau of Economic Analysis, but deficits have been the norm in most years since 1977.
The Trade Deficit
US trade deficits have also grown increasingly common since the late 1970s, fueled largely by the purchase of foreign oil and foreign consumer goods. In 2007, for example, the US ran a trade deficit of about $708 billion - the difference between its $2.3 trillion in imports and its $1.6 trillion in exports. Oil and other petroleum products accounted for about 41% of the deficit. Consumer goods accounted for another 46%.
The bottom line, of course, is that considerably more dollars flowed overseas in that year than flowed back to US account holders.
The Budget Deficit
In most years of the past several decades, the federal government has also spent considerably more than it has taken in. While much of the deficit spending has been "financed" by simply using Social Security premiums to cover current spending, some federal borrowing, in the form of Treasury bond sales, has been financed by foreign sources, resulting in future interest payments to overseas accounts - a further drag on the current account.
The net effect of chronic current account, trade deficit and budget deficit is generally to increase the supply of dollars in foreign hands. That can tend to have a depressive effect on the value of the dollar compared with other currencies, since a higher supply of any item relative to its demand tends to lower its price.
But economists find considerable room to debate whether current account deficits are healthy or unhealthy for an economy to carry, since the US and some other countries have managed to log years of sustained growth at the same time they have run significant deficits.
