The Trade Deficit Jumps to a Recovery High on Falling Exports
The June trade report was not good news; the deficit increased to $53.1 billion as exports fell 2.3%, but exports fell at a much slower rate of 0.8%. The export figures were broadly lower across categories and countries. It is also not clear that the surge of Japanese imports that I'd expected was behind the slow drop in imports. As many countries tighten credit and raise rates in an attempt to reduce rampant inflation, it is not surprising that exports have softened a bit. The other bad news was that exports for June were lower than estimated in the first version of the GDP report for the second quarter. That points to another reduction in the already meagre report of 1.4% growth in the second quarter. Though higher retail sales reported this morning may offset part of the problem, it appears GDP growth could be reduced to as low as 1% at the next revision due later this month.
Initial Unemployment Claims Continue Their Downward Trajectory
In positive news, initial unemployment gains dipped to under 400,000, cheering an otherwise gloomy market on Thursday. Claims came in at 395,000, down from 402,000 the prior week. Even the less-volatile four-week moving average dipped to 405,000. I welcome the improvement and expect the recent fall from 478,000 in late April to 395,000 currently will have a positive effect on the August jobs report. That said, I worry that this number could click upward as several announced layoffs become actual pink slips. I suspect many Borders-related layoffs and many announced layoffs in the financial services and drug industries have yet to flow through the numbers. The most recent upward spike and subsequent decline are most likely related to the Japanese automakers in the U.S. drastically adjusting their production due to supply chain disruptions.
Consumer Durable and Exports Dominate Economic Recovery as Inventory Gains Fade
For the past two weeks I've been promising my quarterly chart of major contributors to GDP growth that I update every quarter. Even after the inclusion of the dismal second-quarter data and numerous revisions, the conclusions are basically unchanged from the previous quarter. The new data and revisions do show economic growth came even more narrowly from consumer durable goods and exports. The data also depicted a recession that was worse than previously thought. Though a lot of analysts made a big deal about these revisions, it appears the only drastic change was to the inventory account. Even there, the gains were shifted to the beginning of the recovery and away from the most recent quarters. In fact, a smaller inventory build explains the reduction in the first-quarter 2011 GDP estimate from 1.9% to that market-rocking revision of 1.3%.
The far left column tells the story of this whole recovery after completing two years. Consumer goods and exports have been contributors this recovery, each contributing over 2%. Meanwhile, both residential and business construction continue to detract from GDP growth. Normally0 construction is one of the largest contributors to a recovery, but this time it's contributed zilch. Business spending on equipment and software has been helpful to the cause, but given huge cash balances and the depth of the decline before the recession, it is surprising the contribution wasn't even higher. Inventories provide their typical early burst before inventory growth rates began to collapse. Government, usually not a detractor, has also hurt this recovery. What's not clear is whether the first-quarter negative contribution was an anomaly (a lot of that decline was due to a decrease in defence spending) or a precursor of more bad things to come.
Autos, Gasoline Lead to Second-Quarter Consumption Disaster
The other key question the table raises is the apparent collapse of consumer goods spending in the second quarter of 2011. The drop is almost entirely due to falling gasoline sales (a really good thing, in my mind) and the tsunami-induced fall-off in auto sales. Adjusting for these factors, consumer spending doesn't look like it's gone cliff-diving. Consumer spending was still anaemic but not terribly different between the first and second quarters.
Exports Good but Slowing Some
Another concern: Exports have been a key part of this recovery, and they have been slowing down a bit. Though the export news was pretty good for the second quarter, June was by far the worst month of the quarter. Faltering economies in Europe certainly haven't helped. Still, I am hopeful that a bigger contribution from Boeing (BA) in the second half, as the 787 and the new 747 go out the door to foreign customers, will keep exports growing. Strong exports of agricultural products could be a big help too, even as sales of mining and construction equipment slow.
Industrial Production Should Buoy Enthusiasm This Week
The highlight of this week's economic data should be a relatively strong industrial production report. A combination of strong utility growth (due mostly to warmer weather) and a return to healthier auto production should boost industrial production growth to 0.9% or more after a disappointing 0.2% growth rate in June. These statistics, laid on top of last week's initial claims report and retail data and the prior week's employment report should begin to convince market participants that we are not dipping into an immediate recession. A couple of regional purchasing managers' reports are due this week that might shed more light on the manufacturing sector. Lately these reports have been quite volatile and not particularly indicative of the much more important national report. Nevertheless, with the national PMI dipping precariously to a no-growth reading for July, these regional reports (Empire State on Monday and Philly Fed on Friday) will probably take on more significance than they deserve.
Inflation Report Likely to Jump Again
June's inflation report (as measured by the Consumer Price Index) looked exceptionally good, with inflation dropping 0.2% because of falling energy prices. Those energy prices ticked back up again, causing the consensus forecast for inflation in July to jump to 0.4%. Elevated car prices and some food price increases won't help the CPI right now either. I suspect those auto prices will come down as the renewed production of Japanese cars finally reaches dealer showrooms. Energy prices are already back on their way down too. None of this will come in time to help the July report though, which could look pretty bleak to consumers.
Housing Data Due
Though no longer market-moving, a lot of housing data will arrive this week including builder sentiment, housing starts, and existing home sales. Starts are expected to come off their unexpected jump in June and fall back to an anaemic 600,000 units on an annualised rate basis for July. Existing homes, on the other hand, should rebound from disappointing June numbers and improved pending home sales. Consensus is for existing home sales to approach a 5 million home rate. I think we could do better than that gain, which amounts to just 5%. There were also rumours that the National Association of Realtors would provide revised numbers for the recession years based on an internal review. I'll take those revised numbers as they come (or if they come), and I suspect those changes will result in declines in estimated sales in 2008-09. The revisions could make for some nasty headlines, but changing old data isn't very likely to change the here and now. We are still mired in the worst real estate recession since World War II.
