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Deficits and imports vs exports and inventories
Simply Economics - February 9, 2018
By Mark Pender, Senior Editor



Washington's budget deal to increase spending by $400 billion over the next two years is the latest test of traditional economic prudence. Increased government spending will join another increasing stress, that is the nation's appetite for foreign goods. Whether sports cars or household basics, consumer loyalty to foreign brands is, at least for the GDP account, burying the strength in exports.


The economy

In bad news for fourth-quarter GDP revisions, the nation's trade gap widened sharply in December, totaling an unexpected $53.1 billion for the deepest gap of the expansion and $8.5 billion deeper than December 2016. December imports swelled by $6.3 billion to $256.5 billion (tracked in the red area) and are a direct subtraction from GDP. The good news is a solid $3.6 billion monthly rise in exports to $203.4 billion (blue area) which, in a partial offset to imports, will add to GDP. For 2017 as a whole, the deficit came to $566 billion for an average of just over $47 billion per month.


Turning to percentage change, year-on-year imports (tracked in the red columns) increased by 9.6 percent in December and are trending higher while year-on-year exports (blue line) rose 7.3 percent and are also trending higher. The clear trouble spot on the import side is consumer goods, up a year-on-year 12.4 percent in December. In dollar terms, imports of consumer goods totaled $55.5 billion in the month and for 2017 as a whole, came to $605.2 billion.


Country totals are in for full-year 2017 and the goods deficits are sizable: China up 8.1 percent on the year to $375.2 billion; EU up 3.2 percent at $151.4 billion and centered with Germany but also including a sizable deficit with France; Mexico up 12.2 percent at $71.1 billion; Japan up fractionally at $68.9 billion; and Canada up the most by far in percentage terms, 63 percent higher to $17.6 billion. Keep these results in mind as trade policies, especially NAFTA negotiations, unfold through the year.


These swamping totals for imports drown out what are strong results for exports. The graph tracks the blue columns of capital goods exports vs the green line of the trade-weighted dollar. The lower this line goes, the more affordable U.S. goods are to foreign buyers and the higher the blue columns should climb. And for foreign buyers, it's the nation's capital goods, like machinery and aircraft, that are most in demand, totaling $47.4 billion in December and $533.5 billion for all of 2017. In year-on-year percentage terms, capital goods exports are rising at a respectable mid-single-digit pace. These readings are confirmation of the nation's central strength and a good one to have -- high end industrial goods.


The export of services is another strength, totaling $711 billion last year and rising at nearly at just about the mid-single-digits. Here too, strength is at the high end, that is demand for U.S. technical and managerial expertise. The export index of the ISM non-manufacturing report has been correctly signaling this rising trend though at a much more significant rate of growth. The over-performance of small sample surveys has been a consistent feature of economic data over the last year which brings us to a key component of the ISM report and also turns our focus to the week's labor indications. ISM's non-manufacturing employment index has been taking off, up more than 5 points in January to a very rare plus 60 score of 61.6 for what is by the far the best of the post-2008 expansion. Had this reading come out before the prior week's employment report, expectations would have risen for January's results which in fact did prove strong. The graph tracks the blue line of the index against the green columns of actual payroll growth excluding manufacturing which came to 185,000 in January. Month-to-month growth is the uninterrupted theme of this graph though actual growth, unlike ISM, is not accelerating. Why the difference? Perhaps general optimism and the economy's momentum are encouraging greater participation among ISM's volunteer panel. Either that or actual payrolls, perhaps, are set to accelerate in line with the ISM.


But there's one report that is not pointing to acceleration, at least at the headline level. Openings in the government's Job Openings and Labor Turnover Survey (JOLTS) are clearly slowing, down 2.8 percent in December to 5.811 million which was well below Econoday's low estimate. This was the third monthly decline in five months and pulls down the year-on-year gain to what is still, however, a healthy 4.9 percent. Hires are steady, down fractionally in the month to 5.488 million and keeping the spread with openings also steady, at 323,000. But, in a sign of strength, quits are on the rise, at 3.259 million for a 3.1 percent December gain that lifts this year-on-year increase to 5.6 percent. In theory, increases in quits could suggest that workers, growing more confident, are switching jobs for higher pay. With market attention focused on wage inflation, the quits reading of this report is something to keep our eye on.


But there is one single indication that shows how strong demand for labor is, specifically how low layoffs really are. Initial jobless claims have posted four straight very favorable readings, at 221,000 in the February 3 week which pulls the 4-week average down to 224,500 for a new 45-year low. This is a very early indication of strength for the February employment report. Other readings include low levels for continuing claims and a very low 1.4 percent unemployment rate for insured workers (this excludes job leavers and labor market re-entrants).


We end the week with a look at the need to restock inventories, a source of future strength for the labor market. Wholesaler inventories rose a modest 0.4 percent in December to $612.1 billion, rising in line with manufacturer inventories and a bit faster than retailer inventories which are flat. Final numbers are still coming in but the inventory build during the fourth quarter looks to have slowed to a quarterly 0.6 percent increase from a 1.2 percent rise in the third quarter. Slowing inventory build is a negative for GDP but, when demand is strong as it is now, it is a positive for production and hiring. How strong is demand? Sales at the wholesale level were up a year-on-year 9.1 percent in December compared to only a 3.4 percent increase for inventories. The stock-to-sales ratio is at 1.22, down from November's 1.23 and vs 1.29 in December last year.


Markets: Is the room spinning or is it me?

What makes the ongoing wobble less frightening is the absence, at least so far, of counter-party failure and cascading defaults. January's surge in Treasury yields, including a 30 basis point jump for the 10-year, is cited as a trigger for the ongoing trouble, a rise tied to strong economic growth, the risk that wage inflation will finally emerge, and a resulting move by the Fed to increase rates more energetically than expected. These issues have moved the market's focus away from profit and toward security, a factor that ironically, as buyers bid down yields, is now holding down the increase in Treasury rates. At 2.86 percent, the 10-year yield rose only 2 basis points despite the fireworks in the stock market. And the 2-year yield actually retreated this last week. But a new rise in government spending and a sudden reduction, at least initially, in tax receipts points to an accelerating rise in Treasury issuance which can't be good for value. Not to mention that the Fed, in its balance sheet unwinding, is cutting back its own bond buying efforts at an increasing rate. Yet U.S. Treasuries are nevertheless a safe place to keep money and may prove especially attractive, given much lower yields in Europe and Japan, to foreign accounts.


After daily swings consistent with heavy nausea, the Dow ended the week at 24,190 for a 5.2 percent weekly loss following the prior week's 4.1 percent dip. The good news is that the year-to-date decline is still limited, at 2.1 percent. Oil was really hit, down 9.1 percent in the week to end back under $60 at $59.23. Gold is doing better, down only 1.1 percent at $1,317 as is the dollar, up 1.4 percent in the week to trim the 2018 loss to 2.0 percent.



Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2017 2-Feb-18 9-Feb-18 Change Change
DJIA 24,719.22 25,520.96 24,190.90 -2.1% -5.2%
S&P 500 2,673.61 2,762.13 2,619.55 -2.0% -5.2%
Nasdaq Composite 6,903.39 7,240.95 6,874.49 -0.4% -5.1%
Crude Oil, WTI ($/barrel) $60.15 $65.13 $59.23 -1.5% -9.1%
Gold (COMEX) ($/ounce) $1,305.50 $1,332.70 $1,317.50 0.9% -1.1%
Fed Funds Target 1.25 to 1.50% 1.25 to 1.50% 1.25 to 1.50% 0 bp 0 bp
2-Year Treasury Yield 1.89% 2.14% 2.07% 18 bp −7 bp
10-Year Treasury Yield 2.41% 2.84% 2.86% 45 bp 2 bp
Dollar Index 92.29 89.16 90.4 -2.0% 1.4%


The bottom line

Exports are on the rise which reflects building global demand and what, overshadowed by the increase in imports, is a hidden strength for the economy. Another hidden strength is the need to restock inventories which highlights the economy's central feature: strong demand for labor. Ultimately, it's the play between labor strength and Federal Reserve policy, that is wage gains vs the risk of increasing rate hikes, that has captured the attention of the financial markets.


Week of February 12 to February 16

A week filled with inflation data gets rolling on Wednesday with the consumer price report where any unexpected pressure in the core rate could reflame rate-hike concerns. Wednesday also sees January retail sales and though a soft headline is the call, a seventh straight month of solid strength is expected for the ex-auto reading. Producer prices, which have shown pressure in recent months, will open Thursday's data followed by the industrial production report where manufacturing has been showing surprisingly little lift. Friday's data include import and export prices, which outside of petroleum have been flat, and also housing starts where permits have been on the rise. Note also there will be two overlooked reports worth tracking, the Treasury International Capital report on Thursday and the latest on foreign demand for U.S. securities and e-commerce sales on Friday for the latest on the web's share of the retail sector.




Treasury Budget for January

Consensus Forecast: -$51.0 billion

Consensus Range: -$29.0 billion to -$57.0 billion


The Treasury budget for January will offer the first data on the effects of this year's tax cut. The Econoday consensus is calling for a sizable deficit of $51.0 billion.




Small Business Optimism Index for January

Consensus Forecast: 105.8

Consensus Range: 105.0 to 107.0


Forecasters are calling for a bounce back in the small business optimism index which fell sharply in December on a falloff in confidence and plans to draw down inventories. Econoday's call for January is 105.8 vs December's 104.9.




Consumer Price Index for January

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.3% to 0.4%


Consumer Price Index

Consensus Forecast, Year-on-Year Change: 2.0%

Consensus Range: 1.9% to 2.3%


CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 1.7%

Consensus Range: 1.7% to 2.0%


Inflation may be under new scrutiny but one place it has been hard to find is in consumer prices. And not much price traction is expected to appear in January's report with the core rate (less food & energy) seen up a modest 0.2 percent with the year-on-year expected to fall 1 tenth to 1.7 percent. The consensus for the headline CPI is a gain of 0.3 percent for a yearly rate that is also down 1 tenth, at 2.0 percent.


Retail Sales for January

Consensus Forecast: 0.3%

Consensus Range: 0.0% to 0.5%


Retail Sales Ex-Autos

Consensus Forecast: 0.5%

Consensus Range: 0.1% to 0.8%


Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.5%


Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.5%


Unit auto sales proved very weak which is expected to hold down January's retail sales gain to a moderate 0.3 percent. When excluding autos, however, sales are expected to show a seventh month of solid strength, at a consensus gain of 0.5 percent. When excluding autos and also gasoline, where higher prices are a positive for the month, sales are expected to rise 0.4 percent. When also excluding food services and building materials, control group sales are likewise expected to come in at a 0.4 percent gain.


Business Inventories for December

Consensus Forecast,  Month-to-Month Change: 0.2%

Consensus Range: -0.3% to 0.4%


Forecasters are calling for a modest 0.2 percent build for December business inventories, data that will be an input into the second estimate for fourth-quarter GDP.




Empire State Index for February

Consensus Forecast: 17.5

Consensus Range: 13.0 to 18.0


The Empire State index pulled back in January to what was still a very strong rate of growth. Though growth for most of January's readings slowed including shipments and employment, price data showed acceleration including expectations for future costs and future selling prices. After 17.7 in January, the consensus for February is 17.5.


Initial Jobless Claims for February 10 week

Consensus Forecast: 229,000

Consensus Range: 225,000 to 230,000


Initial claims are expected to come in at 229,000 in the February 10 week compared to 221,000 in the January 27 week

when the 4-week average, at 224,500, hit a 45-year low. Low levels of claims are consistent with minimal layoffs and strong demand for labor.


Philadelphia Fed Manufacturing Index for February

Consensus Forecast: 21.5

Consensus Range: 19.0 to 24.7


Like Empire State, slight slowing at a still a strong rate of growth was January's result for the Philly Fed manufacturing index which is expected to hold steady in February at a consensus 21.5. Shipments, the workweek and employment have been climbing sharply and are raising questions over the sample's capacity constraints.


PPI-FD for January

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.4%


PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%


Producer prices did show pressure toward the end of last year but not in December when they fell an unexpected 0.1 percent at the headline level on a pullback in service costs. Forecasters are looking for a snap back in January to a gain of 0.4 percent. Less food and energy is seen up 0.2 percent with less food, energy and trade services also expected to rise 0.2 percent.


Industrial Production for January

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.3% to 0.5%


Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.2%

Consensus Range: -0.1% to 0.3%


Capacity Utilization Rate

Consensus Forecast: 78.0%

Consensus Range: 77.7% to 78.2%


The manufacturing component of this report has been an anomaly, showing a long trend of marginal growth against a full year of record readings in regional and private samples and now sharp acceleration underway for actual factory orders and shipments. And yet manufacturing hours were down in the January employment report and have forecasters calling for another weak month of production in this report, at a consensus January gain of only 0.2 percent following a 0.1 percent gain in December. The report's two other components, mining and utilities, have been mixed with the former showing strong growth but the latter up and down on weather-related demand. Taken all together, the consensus gain for January industrial production is, like that for manufacturing, 0.2 percent with total capacity utilization seen rising 1 tenth to 78.0 percent.


Housing Market Index for February

Consensus Forecast: 72

Consensus Range: 70 to 73 


Visible improvement in customer traffic has been giving a boost to the housing market index which is near expansion highs. Sales readings in this report, both current and expectations, have been very strong and accelerating and have correctly signaled the upturn underway for new home sales. Econoday's February consensus calls for steady strength, unchanged at 72.




Housing Starts for January

Consensus Forecast, Annualized Rate: 1.230 million

Consensus Range: 1.210 to 1.305 million


Building Permits

Consensus Forecast: 1.300 million

Consensus Range: 1.260 to 1.320 million


A sharp fall in single-family starts drove total housing starts down sharply in a December report that otherwise showed strength for multi-family starts and especially for single-family permits. The consensus for January housing starts is for a strong snap back to a 1.230 million annualized rate vs 1.192 million in December with housing permits seen at a 1.300 million rate which would be unchanged from December's revised result (1.302 million initially reported).


Import Prices for January

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: 0.3% to 0.6%


Export Prices

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.3%


Import prices have shown pressure in recent months but not when excluding petroleum where readings have been flat. December's results were weak throughout including for export prices. Tangible improvement is the call for January where the consensus for import prices is a gain of 0.6 percent and 0.3 percent for export prices.


Consumer Sentiment Index, Preliminary February

Consensus Forecast: 95.5

Consensus Range: 94.0 to 96.5


Consumer sentiment index recovered from a preliminary January slump to end the month at 95.7 and about where it was in December. This report has been flat unlike the consumer confidence index where readings have been much higher. Econoday's consensus for the preliminary February consumer sentiment index is 95.5 in a result that would point to no measurable panic tied to the stock market.


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