Vital Signs: The Fading Force of Trade

On tap: November trade data, December import and export price figures, November pending home sales

Foreign trade is proving to be an important ingredient in the U.S. economy's resilient performance. In three of the past four quarters up through the third period of 2007, the shrinking trade deficit contributed more than a percentage point to economic growth. While the trade gap should keep narrowing, it is unlikely to maintain the strong pace of last year.

Early foreign trade indicators for the final quarter of 2007 still look positive. Rising oil prices did push up the October trade gap slightly to $57.8 billon and economists are forecasting a larger deficit in November. But the key number to look at when considering trade's part in real gross domestic product is the price adjusted totals. On this front, trade improved in October and could do so again in November if economist's expectations of rising exports come through in the numbers.

Exports have garnered a lot of the attention. Through October, shipments abroad are up 12% over the same period in 2006. Some of this strong gain is due to the weaker dollar. Looking at the monthly export price data, the falling currency is prompting some exporters to raise the price of their goods in dollar terms without a big risk of losing market share abroad.

But a somewhat overlooked part of the trade equation is the sharp slowdown in import growth. Through October, imports are up just 5.1% from the same period in 2006, and that's including the hit from higher oil prices. For the full year 2006, imports rose 10.4% over the 2005 total.

If you adjust for prices changes, the contrast between exports and imports is even starker. Real export growth through October is 8.3%, vs. 1.9% for imports.

Weaker domestic demand could keep import growth down, but it will be a challenge for exports to keep growing at the recent pace. Global economic growth is losing some momentum, buffeted by the widening credit market issues, a weaker U.S. dollar, high oil prices, and the wobbly U.S. economy. Already, October trade data showed some slippage in export growth on a price adjusted basis. And the Institute for Supply Management's December factory activity index showed a marked slowdown in the growth of export orders.

The fundamentals are still in place for trade to be a positive force for the U.S. economy in 2008, just don't expect the same jolt it provided in 2007.

Here's the lineup for the coming week, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
Consumer Credit (billion) Tuesday, Jan. 8 3:00 p.m. November $7.4 $4.7
Wholesale Trade Sales Thursday, Jan. 10 10:00 a.m. November 0.5% 0.7%
Trade Balance (billion) Friday, Jan. 11 8:30 a.m. November -$58.8 -$57.8
Export Price Index Friday, Jan. 11 8:30 a.m. December 0.5% 0.9%
Import Price Index Friday, Jan. 11 8:30 a.m. December 0.3% 2.7%
Treasury Budget (billion) Friday, Jan. 11 2:00 p.m. December $53.8 -$98.2


Monday, Jan. 7, 12:40 p.m. EST - Federal Reserve Bank of Atlanta President Dennis Lockhart speaks to the Rotary Club of Atlanta in Altanta.


Tuesday, Jan. 8, 8:20 a.m. EST - Federal Reserve Bank of Philadelphia President Charles Plosser gives the keynote address on the risks to the economy at the Main Line Chamber of Commerce's Economic Forecast Breakfast in Gladwyne, Pa.

10:50 a.m. EST - Federal Reserve Bank of Boston President Eric Rosengren speaks at the Connecticut Business & Industry Association's 2008 Economic Summit and Outlook Conference in Hartford, Conn.

ICSC-UBS STORE SALES - Tuesday, Jan. 8, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will present sales results for the week ended Jan. 5. The final stretch for the holiday sales season and the early post-holiday shopping period looked a little weak. Sales were down 0.2% for the week ended Dec. 29, after a 2.8% jump during the week ended Dec. 22. On a yearly basis, sales growth slowed to 2.3% in the week ended Dec. 29, from 2.8% in the week ended Dec. 22.

JOHNSON REDBOOK INDEX - Tuesday, Jan. 8, 8:55 a.m. EST

This weekly measure of retail activity will report on sales through the fifth and final fiscal week of December, ending Jan. 5. Through the first four weeks, sales were down 0.7%. In November, spending was up 0.3%. It appears as if the final holiday sales push and the initial post-holiday sales period were not too strong.

PENDING HOME SALES - Tuesday, Jan. 8, 10 a.m. EST

The National Association of Realtors index of pending home sales tracks purchase activity by looking at signed real estate contracts for existing residences. The index is viewed as a leading indicator of existing home sales. Economists will be looking at the November figures for more evidence of potential stabilization in the housing market.

In October, the index posted a second straight monthly gain, inching up to 87.2, from 86.7 the month before from 85.5 in August. In the wake of improving real estate contract volume, existing home sales edged higher in November.

However, the recent gains should not be given much significance yet. The last time pending home sales improved in back-to-back months were last December and November. At that time, other housing figures were also showing some signs of bottoming out. After a mild winter turned into spring, however, housing activity didn't show its typical seasonal pick up and the data showed a rapid deterioration in conditions. Waves of houses were put on the market, but many potential buyers stayed home. Therefore, figures for the first half of 2008 must be examined before any solid declarations about housing hitting rock bottom can be made.


Consumer credit figures are giving off mixed signals. Economists are forecasting a jump of $7.4 billion in new debt for November. This would follow an October increase of $4.7 billion and a $3.2 billion rise in September, an 11 month low.

What's more, the amount of auto, education, and similar type of loans outstanding contracted in both months, a first since late 1992. The latest results are a reflection of weaker auto sales and potentially stricter lending standards by banks.

At the same time, people are still pulling out their credit cards. The balance of revolving credit grew by $6.3 billion in October, after an increase of $4.6 billion in September. The yearly growth rate actually picked up to 7.5%, a more than six-year high.

The monthly changes in revolving credit will be one gauge of whether the subprime focused credit market turbulence is spreading to other lending channels. This measure of consumer debt could also be affected by any pronounced slowdown in consumer spending.


Wednesday, Jan. 9, 9:30 a.m. EST

Federal Reserve Bank of St. Louis President William Poole discusses the U.S. economy to the Financial Planning Association of Missouri and Southern Illinois in St. Louis.

MORTGAGE APPLICATIONS - Wednesday, Jan. 9, 7 a.m. EST

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Jan. 4. Activity has fallen off in recent weeks. The seasonally adjusted purchase index decreased 8.5% to 360.8 from 394.5 in the week ended Dec. 28. The fall in refinancing activity was sharper, with the index dropping 11.8% to 757.4.

The latest declines pulled down the four-week moving averages. The moving average for the purchase index was 412.4 from 438.2. The refi index cooled down to 2127.4 from 2412.5 during the week ended Dec. 21.

The interest rate for 30-year fixed-rate mortgages ticked down to 6.05% from 6.1% the week before and 6.18% during the week of Dec. 14.


Thursday, Jan. 10, 1 p.m. EST - Federal Reserve Bank of Kansas City President Thomas Hoenig speaks about the U.S. economic outlook to local business people in Kansas City.

JOBLESS CLAIMS - Thursday, Jan. 10, 8:30 a.m. EST

The number of initial jobless claims retreated to 336,000 from an upwardly revised 357,000 for the week ended Dec. 22. In the week ended Dec. 15, claims climbed to 348,000.

The four-week moving average did recede to 343,750 in the week of Dec. 29 from 344,500. Continuing jobless claims, which are a week behind the initial claims figures, reached a two-year high of 2.76 million from 2.72 million in the week ended Dec. 15.


Economists expect a solid increase in November wholesale sales. In October, purchases grew by a better-than-expected 0.7%. There was strong demand for computer equipment, metals, and pharmaceutical drugs. Meanwhile, the data showed signs of weakness in the auto sector, with sales falling 2.4%, after a solid 3.4% gain in September.

On a yearly basis, wholesale sales grew at a robust 11.5%, the biggest gain since August of 2006.

The strong pace of sales helped keep a lid on inventories, which posted big gains of 0.7% and 0.6% in September and August, respectively. Rising demand and the halt in inventory growth pulled the inventory-to-sales ratio down to a record low. In October, there were enough goods in warehouses to cover 1.09 months worth of sales.

The figures show no inventory overhang on the wholesale level, which is a positive for the economy. A lean level of inventories should limit any potential cutbacks in production that businesses may need to make if the economy cools down further.


Friday, Jan. 11, 1 p.m. EST - Federal Reserve Bank of Boston President Eric Rosengren gives the keynote address entitled "The Economic Outlook: A View from the Fed" at the Vermont Economic Outlook Conference in South Burlington, Vt.

INTERNATIONAL TRADE - Friday, Jan. 11, 8:30 a.m. EST

The November U.S. trade deficit of goods and services probably widened due to the dizzying price of oil. The dollar amount of imported crude oil and petroleum products jumped 9% in October. In November, the average price for a barrel of oil rose 10.5% from October which points to another big gain in those categories. The November deficit should be larger than October's $57.8 billion and September's $57.1 billion.

On an inflation adjusted basis, however, imports should remain close to the $137.7 billion in October. Accounting for the price increases, imports of energy and other goods actually slipped in October and have managed a very small 2% increase so far in 2007 vs. the same period in 2006. The sharp slowdown in imports is an overlooked part of why foreign trade has been a big positive for economic growth over the past year.

When it comes to foreign trade, exports are getting most of the attention. Economists see another solid increase in purchases of goods and services by foreigners. In October, exports grew 0.9%, dominated by shipments of civilian aircraft and industrial engines. At the same time, the overall value of food, industrial supplies, autos, and consumer goods exports declined. While exports are still growing at a yearly pace above 14%, there are some indications of a slowdown. Spreading economic weakness to major export markets such as Canada, the euro zone, and Mexico should put a damper on the export boom.

IMPORT AND EXPORT PRICES - Friday, Jan. 11, 8:30 a.m. EST

December import prices probably grew at a more modest pace. Back in November, the cost of imported goods zoomed up 2.7% on a 9.8% surge in the in petroleum product prices. A smaller gain in oil prices during December should translate into a smaller monthly gain. On a yearly basis, prices have picked up the pace, up 11.4% in November from 9% the month before, and 1.9% as recently as August. Most of the gain is petroleum driven, with prices up 29.5% from a year ago in November.

However, the costs in U.S. dollars for imported capital goods, vehicles, and consumer goods are gradually accelerating as well. This later trend is probably tied to the weaker greenback.

Meanwhile, the cost of exported goods grew 0.9% in November with the prices for agricultural products increasing 1.4%. The prices of grains, produce, and meats bought by foreigners increased 23% over the past 12-month period through November. But U.S. producers or capital and consumer goods have also nudged up the prices of their products. With a weaker dollar, American exporters can lift the dollar cost of goods so that prices in foreign currency terms remain the same.

A second option for companies is to keep the dollar price the same, thereby leading to a price reduction in euros, yens and other currencies. This helps businesses gain market share abroad against foreign competitors. Based on the trend in export prices, there appears to be some of both occurring.

FEDERAL BUDGET - Friday, Jan. 11, 2 p.m. EST

Economists expect the December budget surplus to be bigger than it was year ago. In December of 2006, the monthly surplus was $42 billion. The larger monthly surplus would be welcome news on the budget front. In the first two months of this fiscal year, the shortfall came to $153.8 billion, 25.6% bigger than the combined October and November shortfall in 2006.

A rapid deceleration in revenue growth is a big reason why the budget picture is uglier. Corporate tax receipts are up just 2% in the 12-month period through November vs. the prior twelve month period. That's down considerably from the 29.3% pace a year ago. When it comes to personal income tax receipts, the deceleration is less pronounced. Tax revenues were up 11% in November, compared to 12.9% a year ago.

A bright spot is that spending growth remains subdued. Outlays in the 12-month period through November vs. the prior 12-month period were up 3.9%. Last November, spending was growing at a 6.6% clip.


Tuesday, Jan. 8: ALCOA, Apollo Group, Constellation Brands, Family Dollar, KB Home, Supervalu

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