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Trade, Jobless Claims Data Add to the Gloom

Action Economics' forecasts for U.S. GDP and employment fall further on the larger-than-expected trade deficit and surge in jobless claims

It's hard to find much cheer on the U.S. economic front as the holidays approach. Reports on the U.S. trade deficit, trade prices, and weekly initial jobless claims released on Dec. 11 have further depressed both our gross domestic product and payroll employment assumptions for the fourth quarter.

The U.S. economy is continuing to spiral downward, and we now assume a big 6.5% real (inflation-adjusted) decline in GDP in the fourth quarter, and a 480,000 payroll employment decline in December.

The only good news from the Dec. 11 releases: Prices are also falling at a rapid clip, as gauged by the jumbo declines in the trade price indexes for November.

Here is Action Economics' rundown of the Dec. 11 releases:

U.S. Trade Balance

The U.S. trade deficit of $57.2 billion in October was much larger than expected, following a slightly revised $56.6 billion (from $56.5 billion) gap in September. This gap was only modestly below the $61.3 billion recent peak in July. The wide October gap reflected surprising resilience in imports that will likely prove temporary, and we still expect the deficit to fall to the $31 billion area by the end of the fourth quarter.

Exports dropped 2.2%, to $151.7 billion, with declines across all the major components, led by a 4.3% drop in industrial supplies. Imports decreased only 1.3%, which was led by weakness in capital goods (-3.7%) and vehicles (-5.0%).

Petroleum imports actually rose $1.1 billion in October, vs. larger prior declines of $7.3 billion in September and $7.1 billion in August, with the rise reflecting a temporary 18% bounce in volume to a lofty rate of 13.3 million barrels per day. This gain should be unwound in November to leave a hefty $10 billion petroleum import drop next month.

The October data imply a $39 billion net export subtraction from GDP growth in the fourth quarter, following a $29 billion contribution in the third quarter that appears poised for little revision. We now expect a huge 6.5% fourth-quarter GDP decline, following an unrevised 0.5% drop in the third quarter. In real terms, exports are contracting at around a 16% rate in the fourth quarter following a 3.4% growth rate in the third, while imports are contracting at only a 6% rate in the fourth quarter following a 3.2% rate of decline in the third quarter.


U.S. initial jobless claims surged 58,000, to 573,000, in the first week of December, following the 16,000 drop, to 515,000 (revised from 509,000), in the final week of November that included the Thanksgiving Day holiday. Continuing claims exploded, with a 338,000 surge in late November. The claims figures indicate that the labor market is continuing to deteriorate at an accelerating rate, though big weekly swings can be attributed to holiday-related volatility.

We are now entering the seasonal period of large weekly swings between Veterans Day and the third week of January, following a string of distortions to the weekly claims data between late June and October that aggravated use of the figures. Yet, despite big swings, a rapid deterioration in the weekly data over this period corresponded well to the deteriorating payroll pattern. It now appears that claims have ratcheted up to roughly the 550,000 area from the 375,000-400,000 range that was established prior to the summer auto-retooling period.

Our December nonfarm payroll estimate now sits at -480,000, vs. the harsh 533,000 November drop and 419,000 average payroll decline over the last three months. The December estimate may still prove conservative given the bigger November drop, though the projected decline still sharply exceeds the 82,000 average payroll drop through the first eight months of the year. We continue to expect a surge in the jobless rate to 7.1% in December from the 6.7% November figure, and we now expect this rate to peak in the 8.8% area around the third quarter of next year.

For the remaining components of the report, we expect a flat December workweek at 33.5, and a 0.2% gain in hourly earnings that should leave the year-over-year rate dropping back to 3.6% following the spike to a 4.1% gain in November.

U.S. Trade Prices

The U.S. trade price indexes are continuing to collapse as expected with the global free fall in commodity prices and surge in the dollar, which impacts both the headline and "core" figures for this report. Import prices posted a huge 6.7% headline November drop due to a 25.8% decline in imported petroleum prices and a huge 1.8% price drop excluding petroleum. Export prices posted a 3.2% November headline drop with a 7.0% decline in food export prices and a 2.9% drop excluding agriculture. The big November declines extend the hefty decreases over the prior three months, and we expect another round of big declines in December as well.

We will continue to assume big headline declines for the other November inflation figures of 3.0% for the producer price index (PPI) and 1.2% for both the consumer price index (CPI) and the personal consumption expenditure (PCE) chain price index, alongside core price gains of 0.1% for PPI and 0.2% for the CPI and PCE measures.

The ongoing global financial market collapse will remain the primary focus of Federal Reserve policymakers at their Dec. 16 meeting, and we continue to expect the Fed to cut the federal funds target rate by 50 basis points, to 0.50%, alongside the continuing quantitative easing measures that are now the primary thrust of monetary policy. The free fall in commodity prices and surge in the dollar are providing substantial cover for the central bank on the inflation front as it focuses exclusively on the deterioration in the economy with an unprecedented level of easing in monetary policy.

Englund is chief economist, and MacDonald global director of investment analysis and research, for Action Economics .

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