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Trade Deficit Narrowed for All the Wrong Reasons

Trade Deficit Narrowed for All the Wrong Reasons

Thursday, 06 June 2019 11:05 AM Current | Bio | Archive

INDICATOR: April Trade Deficit, May Layoffs, Revised First Quarter Productivity and Weekly Jobless Claims

KEY DATA: Deficit: Down $1.1 billion; Exports: -2.2%; Imports: -2.2%/ Layoffs: 58,577/ Productivity: 3.4%; Real Compensation: 0.9%/ Claims: flat

IN A NUTSHELL: “It’s nice that the trade deficit narrowed, but it did so for all the wrong reasons.”

WHAT IT MEANS: Tariffs are all the talk, which ultimately means we need to focus on what is happening to both imports and exports. In the first quarter, a sharply narrowing trade deficit added nearly one full percentage point to growth. It is not expected we will see the same improvement and worse, a widening seemed possible. So far this quarter, we seem to be holding our own as the deficit narrowed in April. Unfortunately, not for the right reasons: Both imports and exports declined. A strong domestic and world economy would mean that both rose. Oh, well. As for the details, sales of aircraft, petroleum and vehicles fell sharply and that accounted for most of the export decline. Few areas posted major increases. Our purchases of capital goods, vehicles and consumer products were down quite solidly. That is a worry as it indicates a potential slowing in both business and household spending. As for the China and Mexico situation, the shortfall with China rose in April but is still down by 11% for the first four months of the year. With Mexico, it went the other way. The April deficit was narrower but for the year-to-date, it is 29% wider.

The layoff totals are mounting rapidly. Challenger, Gray and Christmas reported that layoff notices surged in May. They were up by 86% from May 2018 and for the year so far, the total is up 39%. Firms may be having trouble finding workers, but some sectors are cutting workers like crazy. The reductions were centered in retail, of course, but also in industrial goods, automotive, pharmaceuticals.

First quarter productivity was revised downward slightly, but that was expected. The greatest change, though, was in labor compensation. Instead of increasing by a solid 2.6% as initially reported, it was up only 1.8%. When inflation was factored in, hourly compensation grew by less than one percent, a pace that will not allow consumption to stay strong.

Jobless, claims were flat last week and remained at a very low level.

MARKETS AND FED POLICY IMPLICATIONS: Who knows what will happen with the Mexican tariff situation. The president seems intent on imposing them and it is not clear that the Mexican government can make the concessions needed to prevent that from happening. That would mean we would be fighting a two front trade war and if that lasts long, it is almost certainly going to sap the energy out of both consumers and businesses. Much of the trade with Mexico is the cross shipping of corporate inputs and final products. U.S. businesses, especially manufacturers will be paying the tariff tax. And that is likely to be passed on to consumers, who are already having issues with slowing income gains. Growth this quarter is not looking good, but all the trade and political cross currents are likely to mess up the data. The best guess is that if growth in the two percent raget will be about as good as possible. Many forecasters have it lower than that. Tomorrow we get the employment report. It is likely to be a lot softer than many hoped for and that could create uncertainty about the state of the economy and Fed policy. But one month of weak job numbers after a strong month will not cause the Fed to do anything. The members know that the data are volatile and that is what they will chalk it up to. Unless there are two consecutive quarters of really weak data, the Fed is likely to remain patient, so don’t expect anything, especially a cut, anytime soon.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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So far this quarter, we seem to be holding our own as the deficit narrowed in April. Unfortunately, not for the right reasons: Both imports and exports declined.
trade, deficit, gap, reasons
Thursday, 06 June 2019 11:05 AM
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