Is US Consumer Driven Economic Growth in Trouble?

The sharp decline in the trade deficit is good for the GDP calculation, but casts some doubt on the strength of consumer demand, says Morningstar’s Bob Johnson

Robert Johnson, CFA 28 April, 2016 | 12:51PM
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Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We had some surprising data this week, and also some confirmation of trends that we've seen happening in the past. I'm here with Bob Johnson, he's our director of economic analysis, for his take. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with the surprise, which is with trade data. Why was this number so different from what we were expecting?

Johnson: Yes, and this is the advanced number on trade, and it only includes the goods portion. We'll get the services data and inflation-adjust the data a little bit later. But it showed a dramatic drop in the trade balance, and it really is going to provide a situation where it's not going to be as big a negative as many people thought in the overall GDP situation, which was really surprising because again, it fell about $8 billion on a monthly basis, month to month, in terms of the total deficit.

And that's one of the larger declines that we've ever seen. But again, we do caution that it doesn't include services and is not inflation-adjusted. But the make up was kind of interesting too.

Glaser: But what was behind that drive?

Johnson: Yep. Well, one thing it wasn't is U.S. exports. US exports were about as disappointing and declined as expected. The bigger surprise is that imports, which were expected to grow at a pretty large percentage, low single digits, actually declined as well. And that drove the overall trade balance, which is the key number that plugs into a lot of GDP calculations, got so much smaller.

Glaser: A strong dollar means that those imports are cheaper for U.S. consumers, the fact that they weren't buying them even at lower prices, is that a sign that the consumer is in trouble?

Johnson: Well, I think a lot of people are interpreting it that way. The decline in imports was rather broad-based. It was against many categories, but certainly it did include the consumer, and with kind of all eyes on the consumer and a key portion of the U.S. economy, if they're not spending on imported goods, maybe they're not spending on other stuff, either. 

So that got people a little bit worried, but again this is data back from March, and there were other categories that were weak as well. So I wouldn't single this one out, and again, the data seems a little bit fishy to us, the fall, so much, we don't recall a decline like this in the past, and even sometimes when we were coming off strikes and stuff the swings weren't nearly this big. 

So we think maybe eventually this gets revised away a little bit, or we get a bounce back month another time, because it just doesn't really seem to fit to all of the data. So we'll have to see what happens. But it does... Some people did raise that concern that it's not all good news that the trade deficit shrunk so much, it means that the U.S. consumer isn't buying much, perhaps.

Glaser: Let's turn our attention to housing. New home sales were a little bit disappointing, but you think it's important to look at some of the revisions and year over year to get the full picture?

Johnson: Absolutely, and again, to put housing in perspective, we're putting it under the microscope. We may seem to be talking about it a lot lately, and the reason we are is because in an economy that's growing 2% to 2.5% on a year-over-year basis, the three or four tenths that we get out of residential housing is exceptionally important, if that begins to slip. And it can be a volatile sector, so we watch it like a hawk, and especially now as we get to March and April data, when the housing season really kicks in. We don't care if January starts or existing home sales are a little low, but then you start to move towards March and April, and the numbers are still looking pathetic, then you've got a reason for concern.

Johnson: So that's why we're concerned about housing, and that's why we like the fact that the numbers looked relatively good. On the new homes sales report, the number looked like it went down from 520,000 to 511,000 homes on an annualized basis and everybody's going, "Oh, gee, the housing numbers aren't so good."

Well, what they miss is that there were revisions--substantial revisions--to the two earlier months; January and February data. So that all rolls up into the first-quarter data set, so I think we're going to be fine there, and I don't think people really have to worry. And again, this is data that is often revised, and lately the pattern's been pretty clear that every month they add a whole bunch of houses to the database the next month.

They seem to be systematically going in one direction with their error. And so maybe we'll see this number that we got from March revised up in a subsequent month, or a big pop in the month after that. So we'll have to see on that front, but in general, we thought this report was pretty good.

Glaser: And there's signs that existing home sales aren't falling off a cliff either?

Johnson: No. I mean we do worry about existing home sales. We've talked about it many times. There's been a shortage of inventories, and price rises have diminished some of the markets there, and so we've been worried that we're going to slow down there a little bit. And we have a little bit. But we're not expecting it to fall off a cliff. And the pending home sales, that is when you sign a contract for a home, and before the mortgage gets funded and you actually sit down at the table and pass checks, which happens about 45 to 60 days later, the pending home sales index went up sequentially by about 1.5%, and also was up year over year, and it's one of the best readings we've seen in a while.

Everybody was relatively excited about that, but it's still relatively consistent with this 3%-5% existing home sales growth, which is what we've been anticipating all along. But again, it's an important part of calculation, so we're glad to see that it's not falling off a cliff. 

One other thing I'd highlight out of the report, and actually it turned up in the new home sales report, too, which is interesting, is that the West Coast segment was particularly weak in both cases. And in both cases they're attributing it to higher prices, and that maybe it's a sign that if housing prices in other parts of the U.S. start to heat up too much that you'll get a problem like we're seeing in California, where the higher prices are really beginning to cut a little bit in terms of sales.

Glaser: Looking at manufacturing, we've been looking for signs that the sector's really bottomed out and that we're going to, maybe, if not see a big improvement, at least see stabilization. Do we see any of that in durable goods orders report that came out this week?

Johnson: Well, I usually like to look at the number on a year-over-year basis and average it over a few months. And at one point durable goods orders, which are useful because they predict... Because they take a while to produce, they show what might happen in productions as much two, three, four months out in the future, and that's why it's kind of a valuable report.

It's got some kinks in it; it's not adjusted for prices, it's got some airliner stuff in it that's volatile and doesn't make any difference because of Boeing's massive backlog, but in any case we have... At one point we were down about 4% year over year in terms of orders, and we've continually moved back up to the kind of only down 1%-2%. So, that's good news. The problem is, it's opposite of what we have in the new home sales, where they continually find new homes month to month, and we're always pleasantly surprised when the previous month gets revised up.

The bad news here is that the manufacturing data... I swear, for the last six months I've come in here and talked about that it's stopped going down, well it kind of is, but what happens is that we revise the previous month's down as well, so it looks like we're bottoming, but that bottom never exactly hits. So again, I'm still a little disappointed in the numbers and the trends there, but again, we're not falling off the cliff, and the year-over-year data is getting better.

Glaser: Well Bob, thank you for your take on this data today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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Robert Johnson, CFA  is director of economic analysis with Morningstar.

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