imports

/ / , , /

US Trade Gap Worsens: Oil. What’s New?

Today’s trade report is not good. The gap between imports and exports rose to $50.2 billion in May. That’s a 15% jump. By itself that suggests that trade will have a negative impact on GDP when the final numbers are put together. Then again maybe not. Most of that negative shift in May came from oil. As you all remember oil prices have surged and then fallen over the past few months. May saw the peak, so naturally it will record the worst of the trade impact. We should all look for an improvement in June and July. Canada, Mexico, and Saudi Arabia remain the biggest suppliers of oil to the US.

The good news buried in the report is that the decline in the value of the dollar has helped exports of US products. While exports were slightly down overall the value trade in US manufactured goods such as generators, engines and computer chips was at an all time high. So much for the argument that the US doesn’t make anything any more. The problem is that it doesn’t make enough: imports of capital goods such as computers and heavy machinery was at an all time high as well.Outside of manufacturing, trade in services such as accounting and legal services or entertainment rose slightly to record a surplus of $14.7 billion.

Our bilateral trade partners remain much the same: China leads the way with the US having a deficit of around $25 billion; following up are a deficit of $11.3 billion with OPEC; $8.8 billion with the EU; $6.3 billion with Mexico; $2.7 billion each with Canada and Saudi Arabia; and $2.6 billion with Japan. As you can tell oil and consumer goods dominate these relationships.

/ / , , , , , , , , , /

Trade Worsens; Realism at the Fed

A mixed bag today: the US trade gap widened, despite a good increase in exports; and Sandra Pianalto, the head of the Cleveland Fed, made a very sensible speech in which she talked down inflation expectations, and gave a quite gloomy view of the job market.

The trade gap widened to a nine month high of $48.2 billion in March, that’s up slightly from the $45.4 billion in February. Exports were strong, particularly industrial supplies and agricultural products, with the total increasing by 4.6%. One negative was a decline in aircraft exports, but that sector is notoriously chunky and hard to predict on a month to month basis. Obviously the cheaper dollar had some effect in driving this increase, and that, coupled with the worldwide pick up in growth will help lift exports more during the rest of the year.

On the downside, imports grew even more quickly, by 4.9%, largely because both food and oil imports surged. The US imports of oil grew from 8.7 million barrels per day to 9.5 million, even though the average price of oil also rose by $6.59 to $93.76 per barrel. America simply seems unable to shake its oil addiction even at these prices. This increase in oil price is mainly due to the turmoil in the Middle East – when isn’t there turmoil? – and is a driving force behind the recent rise in headline consumer inflation. Likewise US imports of foodstuff grew not just in terms of volumes, but also in terms of prices, so imports were hit with a double whammy which looks set to continue for some time to come.

Meanwhile, the bilateral trade account with China worsened to $18.1 billion, which is an ironic coda to the trade negotiations just wrapping up between the two countries. Note, though, that the overall Chinese trade surplus was less than that in April, at $14.1 billion, which suggests that their trade gap with other nations is in deficit. In general, trade has picked up globally – US trade with central and south America hit all time highs in March, as did US exports to Canada, while US trade with Europe is now back to 2008 levels.

Worldwide activity is evidently well on the road to recovery.

The surge in oil and food prices has led some to fear a consequent surge in US inflation. There is no evidence of this. Wages are the prime factor driving long term inflation, whereas items like food and oil tend to bounce up and down sharply with much less overall impact. There is no question that commodity prices will rise as a long term trend – demand will drive that increase as long as supply remains less flexible – but that impact will be mitigated by a shifting mix in consumption, and stagnant wages.

This is the basic argument Sandra Pianalto gave in her speech today in order to explain why she, and others at the Fed are not concerned about inflation. The recent spike in headline inflation is being driven by what appear to be temporary supply problems – that Middle Eastern turmoil – rather than a sectoral shift. And with the wage and employment outlook looking decidedly weak, there is no solid case for raising rates to dampen inflation fears. Monetary policy must be based on the medium to longer term outlook not the short term which is always more erratic.

This is all rather dull. But at least it is a clear articulation of a realistic view of things, which in sharp contrast with the near hysteria of the hawks who see ghosts in every consumer price increase number.

What does this mean?

The trade figures are worse than expected, but not so much worse that they will distort the GDP figures released last week. First quarter GDP growth of 1.8%, at annual rates, looks like it will stand unchanged, at least as far as trade is concerned. And with Pianalto suggesting it could take as long as five years to get the job market back to normal, there is no impetus behind a rate increase.

So, steady as she goes. GDP growth of between 2.0% and 3.0% is still the general forecast, with a little more risk on the downside than on the upside. And weak employment. We are very close, in other words, to the dreaded doldrums of stagnation. This is not unusual for a recovery coming out of a downturn caused by a collapse in banking. History suggests stagnation or a slow recovery is the norm after a finance driven debacle.

Quite why our policy makers didn’t take history into account in their decision making is another question. Presumably they believe stagnation is acceptable. I don’t. Oh well.

/ / , , , , , , , , , , , , , , , , , , /

The Economy Slows Down

As we all thought, our economic growth slowed dramatically in the first quarter this year. The headline figure you will be reading about is 1.8% growth, down from the fourth quarter of last year when growth was 3.1%. What you will not be reading is the sneaky rounding up involved to get us to that 1.8%! To two decimal places growth was 1.75%. So being more accurate makes things appear a little worse. No big deal, but indicative of the efforts going in to make the headline look as good as possible.

Here’s the breakdown by major category:

  • Consumption 4Q 2010 .. +2.79%
  • Consumption 1Q 2011 .. +1.91%
  • Private Investment 4Q 2010 .. -2.61%
  • Private Investment 1Q 2011 .. +1.01%
  • Net Trade 4Q 2010 .. +3.27%
  • Net Trade 1Q 2011 .. -0.08%
  • Government Spending 4Q 2010 -0.34%
  • Government Spending 1Q 2011 -1.09%

These figures are what is called the “advanced” report and so will be subject to quite a bit of revision. Even so, it seems that the economy cooled off which could be cause for concern. Or perhaps not as long as the declines can be explained away as oddities unlikely to be repeated. The problem I have with these explanations based on “quirks” is that the economy is replete with such things. There are usually one or two odd numbers that appear to have “one-off” explanations. So there is always an element of forth masking the underlying trend. This is why forecasting the economy is more divination than science – despite all the high paid analysts in the media and at the investment banks.

With that in mind, let’s look at the data.

Obviously the key is personal consumption. It amounts to such a large percentage of the whole that any shift there can make the entire economy move. As you can see consumption faded strongly in the first quarter. One reason could be that bad weather kept people away from stores and that the decline will be offset this quarter as better weather sets in. Frankly there isn’t a great deal of more recent evidence to support that view. Retail sales have been decent, but not great at all. A different view is simply that households have pulled back a bit because unemployment has not improved significantly, home prices are still falling, wages are flat, and debts still need paying off. The accumulation of these factors outweighed the need to spend. hence the decline. I think we will experience this kind of stop-start activity for as long as consumer confidence is depressed. Even though April’s confidence figures showed a slight jump up, they are still not suggestive of strong spending.

The big shift from negative to positive in private investment could be interpreted as businesses preparing for expansion. That would be wrong. Recent durable goods numbers do suggest such a trend. But the first quarter investment turnaround was driven entirely by inventories. Other forms of investment hardly moved at all. As I have said before inventory accumulation is a highly ambiguous number. Sometimes a run up in stocks of goods is a sign that retailers expect high sales and thus are gearing up. Other times an accumulation represents a rise in unsold goods because consumption has fallen away and retailers are stuck with an excess. Which is it now? Looking at the hints I find it hard to tell. A rise in imports along with a rise in inventories is usually a sign that retailers are getting ready for higher sales. That’s a positive sign. I think we should take this first quarter accumulation in this light since it offsets the overly large run down in inventories at the end of last year.

Unfortunately the more telling aspect of the investment numbers are much the same as they have been for a while: weak business investment, and very weak residential investment. Businesses are showing some signs of adding to their capital stocks, but as long as the economy has as much excess capacity as it does, there is no real need to add rapidly. And, of course, we all know that real estate is in the doldrums and likely to stay there.

Trade, too, showed a big shift. The sudden drop in contribution to GDP from trade was driven entirely by an equally large change in imports. This was expected because the fourth quarter saw some very strange and large declines in imports that were not sustainable. All that occurred in the first quarter was that we resumed a more normal level of activity. The bad news was that exports faded a little also, so the resumption of a more normal pattern of imports was not offset by stronger exports.

Lastly, government spending is trending down. This may shock the “big government” hawks, but the numbers don’t lie. Federal spending dropped 0.68%, mostly on the back of a decline in defense spending. This is a notoriously volatile figure depending on bulk purchases. So I don’t think it is indicative of a trend. More importantly, both Federal and State spending on small ticket items and wages is falling steadily. This is the trend to watch. Especially as the deficit debate heats up. We have gone from a point where government spending was acting as a stimulus, to where it now acting as a drag. Presumably this is what the austerity hawks want. It is inevitable that, if government spending is cut, it will act to shrink the economy. We can use the UK as an example. There is an austerity program already in effect in the UK and its negative impact has slowed their economy to a crawl. They are perilously close to recession. Given the relative weakness of our private sector, any strong move to cut government spending runs the risk of doing the same here.

This is all tedious to recite.

What should we make of it all?

The economy is evidently not so strong that it can withstand a bout of bad weather. If that is the key explanation being offered to explain the first quarter decline, then we are not in great shape. This seems to be a very slow recovery, and one that is still very susceptible to downside risks. I suppose there is no news in this, but it should give us all pause to reconsider the current mania for deficit cutting and inflation fears.

Neither the deficit nor inflation should be of great concern right now. The focus should be on unemployment and the huge slack in the economy that such unemployment implies. We have too large a pool of idle workers. That means we are radically underperforming in terms of wealth generation. We are leaving money on the table month after month. This affects us all, not just the unemployed. It would be sensible for us all to be involved in getting those people back to work. That means more support, through both continued easy monetary policy and deficit spending fiscal policy.

This won’t happen, of course, because the powers that be have moved on to combat their imaginary demons of inflation and deficits.

This is looking more and more like the 1930’s.

That didn’t work out too well.

/ / , , , , , , , , /

Jobs and Trade: News, But Not New

Neither the trade deficit news, nor the report on new claims for unemployment assistance should surprise us. They shouldn’t upset us too much either.

The trade deficit widened 15.1% in January, the latest month for which we have data. The gap between imports and exports rose to a near record $46.3 billion, up from $40.3 billion in December. This was despite a record level of exports. The problem stems from two different sources. First: importers appear to be stockpiling goods and raw materials in anticipation of the economy’s faster growth later this year. Clearly they don’t want to miss out on that higher activity due to lack of inventory. Second, and perhaps more obvious: the recent run up in oil prices and driven the value of petroleum imports up way beyond expectations. Plus, anytime the economy accelerates we draw in more oil. So both prices and volumes rose.

Should we be concerned? A little. But not yet too much. An improvement in our net trade position – the deficit dropped – during the last quarter of 2010 was a major contributory factor to the jump we saw in GDP. So, to the extent that we see a repeat of January’s reversal during the rest of the first quarter this year, we will also see a corresponding drag on GDP. Indeed since oil prices have jumped around since January we can almost guarantee trade will be a lot more negative than it was late last year. Like many things in economics a deterioration in trade is a useful sign of an otherwise healthy economy. We tend to import more as we grow. So rising imports suggest that businesses are preparing to sell more, and this is a good omen. Of course we would like to export more as well to keep the imbalance to a minimum, but boosting exports is a longer term project and is not a primary solution to our economy’s ills anyway.

On the jobs front today’s news was also a mixed bag. On the surface the 26,000 increase in new claims for unemployment assistance is not good, but the total stayed below 400,000 and there were mitigating circumstances that suggest this is more a statistical blip than a reversal of the recent improving trend. That 400,000 barrier is important because we need to keep new claims trending down towards a much more healthy 325,000 – 350,000. But the bigger news is that this week’s claims number is distorted by the oddities of spring break holidays in New England, where large numbers of people with jobs in education were able to make a claim for the one week covered by that break. The biggest jump in claims were all centered in the New England states and will most likely be reversed next week. Without this aberration the data was much more benign, which suggests that the all-too-slow upturn in the jobs market is still on track. Let me repeat myself: that improvement is incredibly slow moving and weak by historic standards and continues to cast a long shadow over the economy. The current attempts to cut government jobs threatens to throw what forward momentum we have into reverse, so we have to pay particular attention to this data over the next few months.

One last thing: household debt continues to decline across the US economy, although the latest data shows that the decline is now slowing considerably. US households have been cutting debt for eleven straight quarters, but the fourth quarter’s annualized decline of 0.6% is the slowest drop since the third quarter of 2008. One thing to note was that the decline was driven almost entirely by a 1.3% drop in mortgage debt. In contrast, consumer credit returned to a growth path by increasing 2.0% at the same time. The same government report shows household net worth to have grown $2.1 trillion, back up to $56.8 trillion. This is still below the all time peak of 65.9 trillion set back in early 2007, with rising stock prices offsetting some of the drop in home values since then. It bears repeating that these figures don’t serve us well when we look at the entire economy simply because that wealth is so concentrated. That a small number of people have witnessed a solid recovery in their balance sheets does not automatically extend to a generalized feeling of well-being. The massive inequality of incomes and wealth now built into our economy inhibits growth by marginalizing the lower end consumer who is likely to spend a greater portion of their income, while privileging the higher end consumer who is likely to save more at a time when the economy is already awash with cash for investment. Yet that cash sits under deployed. This is why my view on policy remains that we focus on getting demand pumped up. I seem to be, once more, in the minority though, so look for the economy to underperform for a while yet.

/ / , , , /

Quick Comment: Trade

Today’s report tells us that the US trade balance worsened 5.9% in December to $40.6 billion, which ends a period of improvement and could potentially slow down overall growth early next year. The biggest shift came in oil, where imports and price increases drove the imbalance to its highest since October 2008. Overall for the entire year 2010 the trade deficit totaled $497.8 billion which is an increase of 32.8%. Exports rose well, by 16.6%; but imports also rose strongly, by 19.7%.

A great deal of focus has been on prices of commodities and raw materials, but we should all recall that the portion of finished goods prices that these things represent is actually quite small. Labor costs are much more significant. So, even though rising oil prices will act to increase the deficit it isn’t clear that those increases will translate into a sudden surge in inflation. There just isn’t any sign of such a surge in the one component capable of driving inflation quickly higher: wages. This is for obvious reasons, while unemployment remains as high as it is.

Meanwhile the trade gap widening will act as a drag on GDP. Don’t forget that trade added a major portion of the fourth quarter’s overall growth, so a wider than forecast gap in December may imply a lower GDP number when the next revision is announced.

Lastly: as US growth continues to maintain its current pace retailers and manufacturers will be impelled to restock supplies and inventories at higher levels. This suggests that imports will continue to outpace exports in the near term. In turn this tells us that trade will continue to dampen GDP growth throughout the next phase of the recovery.

< 1 2 3 4 5 >»