Trade Deficit Forecast to Have Widened (And Ruminations on a Possible Tipping Point)

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Bloomberg, getting a jump on next week’s news, tells us that expectations for the Commerce Department’s report on the US trade deficit, due on July 11, is that it got worse. In general, increasing current account deficits (of which trade is the biggest component) put downward pressure on currencies. But our nasty conundrum is that the rise in the gap is due to rising price tags on commodities imports, notably oil. A depreciating dollar only makes matters worse.

From Bloomberg:

The U.S. trade deficit probably widened and the cost of imported goods jumped, underscoring how the surge in oil prices is hurting growth and igniting inflation, economists said before reports this week.

The gap between imports and exports grew to $62.4 billion in May, the widest in almost two years, according to the median estimate of economists surveyed by Bloomberg News. The import- price index climbed 2 percent last month, the poll showed.

Increasing fuel expenses indicate companies will keep cutting payrolls and trimming equipment purchases to maintain profits. At the same time, more expensive foreign goods will open the way for U.S. businesses to also raise prices, signaling inflation may not ebb as the Federal Reserve projects.

Yves here, I don’t buy the latter view at all, that companies will put through price increases beyond what they really need to. A weakening economy does not give merchants pricing power. Food producers have taken margin hits to avoid subjecting consumers to the full impact of their cost increases, and food purchases are not elective (although particular items are and therefore subject to substitution). Similarly, apparel retailers are offering deep discounts now, well ahead of schedule, due to shoppers pulling in their horns. We will still have an inflation problem until commodities prices stabilize, but I don’t see domestic producers raising prices due to weakened import competition.

Back to Bloomberg:

The increase in petroleum was a primary reason for the widening of the trade gap in April. After eliminating the influence of prices, the trade deficit shrank that month to the lowest level since August 2003, as exports grew. The after- inflation trade numbers are the figures used to calculate gross domestic product…..

The import-price index is the first of three monthly inflation gauges released by the Labor Department. Economists projected the measure would be up 18.6 percent from June 2007, according to the survey median. It would be the biggest 12-month gain since records began in 1982.

The government is scheduled to report wholesale prices on July 15 and consumer prices the following day…

Other reports this week may signal the risks to growth aren’t letting up. Pending home resales fell 2.5 percent in May, economists project a report from the National Association of Realtors on July 8 will show. The figures are based on contract signings, making them a leading indicator of actual purchases, which are tabulated when a deal is closed a month or two later.

Separate but related is an excellent post by Tim Duy, who is sufficiently agitated about the state of affairs to have written on holiday with access only to dial up. It contains some instructive stories about how some individuals made unconventional, prescient readings of changing economic circumstances, and worries about the prospects for US consumption ultimately supported by foreign central banks.

I may be wrong, but I think there is an increasing, inchoate sense that we are on the verge of a tipping point (I see (Duy’s urgent need to post on vacation as an indicator). I probably can’t speak for other gloomsters, but even though I have long thought It Would All End Badly, I still get a sinking feeling when I look over the cliff and see how far down down might be. While I see lots of reasons to expect terrible outcomes, part of me reminds myself that we have muddled through disasters somehow and typically managed to avoid the worst. But can we assume this time won’t be different?

And when we have triggers, like big declines in the stock market, that sense of peril is worse (and mind you, I am positioned to profit from that sort of day!). But as more people start to look over that cliff into the chasm that I have studied from time to time, I think more and more of the public at large is getting a sense of how far the fall might be. And most people are constitutional optimists, so that line of thinking is probably more upsetting to them than to folk like me.

I may be placing too much faith in that collective barormeter of animal spirits, the stock market. Normally, after a month as bad as June, you’d expect some sort of reversion (indeed, Barry Ritholtz has called for one). And last week may have been distorted by the July 4 holiday. But looking at the trading in the US, several attempts to rally (admittedly some on dubious pretenses, but what’s new about that?) petered out.

I am wondering whether investors are too shell-shocked to get out at current levels and are looking for a rally either to sell into or to validate a decision to stand pat. If an upward move looked to have any sign of conviction, some would revert to form and start bottom fishing. But I wonder what happens if another bear market bounce is not forthcoming.

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  1. Anonymous

    I realize that the price of oil has been increasing, but then, so has the price of wheat, soybeans, and corn, major American exports.

    While oil pricing plays a major role in American import deficits, the increase in exports due to rising grain prices is simply glossed over.

    The trade numbers are likely to be really, really bad – reflecting the reality of a transformation over a generation in which Americans have proudly turned themselves into a nation of consumers.

  2. Richard Kline

    I will be interested to see if US exports changed meaningful, particularly exports ex grains and distillates. The only reason for meager optimism in the last year has been the economic prop of increased exports; if that falters there’s . . . nothing. Well, except _prayer_, but that’s a given. : )

    I fully expect to see a DOW 7000 in the present cycle. More likely in 09, but I’m no expert caller or pretend to be. I’ve wondered whether we would have a crash scenario, but my sense looking at the declines over the last eight months or so is more that we will have a steady grind down to November, 100 points here, 250 there. Equity holders just don’t _want_ to get out, they can’t believe that the stock market wealth machine is running seriously in reverse, so there is no incentive for them to sell; instead they hold on to hope. That’s the story of the last six months, and for reasons of my own I consider it yesterday’s chart as of 1 July. There is nowhere to go but down, really.

  3. Anonymous

    Not sure dollar depreciation really only makes things worse. Why couldn’t oil fall as the dollar depreciates further? You’ve got interest rate differentials, cyclical factors, and imbalances weighing on the dollar, and the two latter factors are adverse for oil prices too.

  4. kingless

    I’m too lazy/weak to google my way to Tim Duy’s excellent post. The link in your post takes me to Google Reader.

  5. Anonymous

    Commodities and oil will crash post-Olympics; dollar will strengthen; non-oil and oil deficits will improve; growth will continue slow to flat; rates will not go up; trading range for stocks, no crash.

  6. William W. Wexler

    It seems to me that there are many conflicting forces working against each other to create chaos and shear. These forces will release on the weakest part of the container, which is the bottom 80% of the population.

    I agree with the assertion that as energy costs increase, companies will cut back on jobs and equipment purchases. Pressure from low price imports on the one hand, increased manufacturing costs on the other… who gets the squeeze? Always the bottom, never the top.

    Vehicle fuel costs are so high now that consumers are having to choose what to let go of next. In far too many cases it’s been solvency, as people leverage themselves into precarious debt loads with credit cards and second mortgages hoping and assuming that something’s got to give. The standard of living down here in the streets is diving like a Kamikaze. Unemployed on COBRA are sitting on a ticking time bomb waiting for their health insurance to expire and their already absurd premiums to explode. The steady effort to cut away the social safety nets and bankruptcy protection since Reagan are about to become front page news.

    So to summarize: the price of gasoline is killing us and pretty soon it will be chopping us up into bits, too. Consumer debt and bad mortgages will contribute to widespread financial ruin. The national debt and falling dollar is jeopardizing the whole economy as we divert national resources into foreign misadventures. The US government has done nothing but contribute to the problem by deregulation and regressive tax policies. Their primary output is phony economic forecasts, unrealistic interpretation and outright distortion of economic data, and disingenuous platitudes to convince the plebes that everything is just hunky-dory.

    I never thought I’d live to see another Depression, but now I think it’s just around the corner. When we hit $7 a gallon this fall, that’s when it’s going into crash dive.


  7. Bob_in_MA

    OK, I’ll bite. Has anyone seen this excellent post by Tim Duy? Care to give a clue?

  8. eTrader

    Coal dropped significantly last Thursday. Is there any reason that oil, wheat, iron ore, copper wouldn’t follow?

  9. RK

    I would like to hear some comment to a very simple
    proposition which has received no attention in the current raging debate about the causes of surging oil
    (and by contagion gas, coal) prices. The two alleged causes cited by experts are fundamental demand and
    speculative, or investment demand. In both cases these play out in the commodities markets where forward instruments are traded. Each contract has
    a buyer and a seller. Traditionally buyers are users
    or speculators. Traditional sellers are either holders
    of supply hedging their exposure, or producers
    selling future production at a locked in price. But what has happened in at least some cases (and I know this because Encana did this a few years ago)
    is that instead of locking in a price with a futures contact that limits greater price, they are using puts
    or equivalent to set a floor, but not a ceiling on price. Thus a major source of oil futures sellers is
    drying up, leaving speculators to fill the gap, which
    they have been less willing to do as their heads are handed to them. (for Encana, the aha moment came when they had to show $600,000,000 of losses on forward hedges)

  10. Anonymous

    Tim Duy’s agitation may correlate a little more closely with a rather non-stellar track record of recent Fed funds rate predictions.

  11. Anonymous

    Stock mart performance last week was a head-scratcher, I expected more mean reversion. Between fuel demand destruction, vaporization of bank capital, and the probable bankruptcies (& federal bailouts) of GM & Ford, the tipping point draws nearer. That all you got, plunge protection team?

  12. Been there

    Yves, I saw an article in this week’s BW, Mandel on Economics column-“How Strong is The US Consumer”.

    He observed that(pulling data from the first quarter US Census Retail Sales Report), even though the retail sales number was up 1.3% during 1Q08 vs. 1Q07, 36% of that increase was due to online commerce. Further, he correctly noted that the Census website noted (which upon review was located under the frequently asked questions section) that “Sales made to a customer in a foreign country through a US website are included in the estimates”.

    Mandel’s specific concern was that US consumer spending may be overstated because of the inclusion of foreign online retail sales. He states “…we don’t know how US retailers are reporting purchases on their non-English language websites…” He further states that a literal reading of the wording of the Census survey, where the data is collected, suggests this clearly could be the case.

    Question- Do you know if the US government captures and adjusts elsewhere for the US online retail sales to foreigners (so that the US current account deficit would tend not to be overstated by this missing info)?

  13. Anonymous

    As some guy named Sinclair likes to point out, they (PPT) can influence the markets but they can’t change trend.

  14. Tom Lindmark

    Thanks for the links to Duy’s column. I agree with bob_in_ma’s comment. Not really much there.

  15. Anonymous

    I think the crash will come once Walmart’s bottom line is trounced by price increases that it won’t pass onto consumers.

    I think they are the last hold out for the safe investor.

  16. Anonymous

    Interesting commentary from Wall Street Journal editorial board member Brian Carney, “The Credit Crisis Is Going to Get Worse,” is a converstion with Ted Forstmann saying we’re only in the second inning. In it he states a 3 “I” Buffett rule I never heard. First “I” is the innovator, the second “I” is the imitator and the third “I” is the idiot. Obviously, he thinks we’re in the third “I”

  17. Anonymous

    THe irony is that U.S investors put hundreds of billions of dollars into international stocks in 2007.

    Last time I checked, international markets were faring worse from the highs just last year.

    Yes, U.S investors are losing on the S&P decline, but they are losing even more money on their international stock exposure.

    Ouch. Just when you didn’t think it could get any worse.

  18. donna

    Those of us who had depression-era parents that taught us well how to skimp and save are feeling pretty thankful for them these days…

    We’re in the top 5 percent of income in the country and are grateful for that as well. But I’m helping out a friend in L.A. who has beenout of work for 11 months. He’s got nothing left but an IRA that he’s forced to tap into. But at least he has that.

    So many have nothing to fall back on. I feel for them…

  19. roger

    The first Anonymous’s phrase: “a generation in which Americans have proudly turned themselves into a nation of consumers,” is interesting, because, of course, this turn was not accidental. The free trading fraternity praise the virtues of free trade precisely for this reason – it replaces a manufacturing economy, with its tendency to unions who advocate strong bargaining positions for labor, with a consumer economy that has two parts: imports made by cheap labor abroad; and, to make up for lack of wage increases, the reign of easy credit, which increases the consumer’s purchasing power not only for non-durable goods, but for assets such as houses.

    It is an interesting juggling act. However, the problem is that trading out one’s manufacturing center, while it might have some present benefits in terms of prices for goods, is also trading out future technology in that manufacturing center. In effect, a nation that destroys, say, its automaking manufacturers, is not going to have a say in the making of new auto designs in the future. In essence, we de-invested in knowledge, for knowledge is embodied in manufacturing. That is what the unlimited free trade regime has been all about.

    Thus, we are undergoing inflation in the export of primary products very much like the inflation undergone by the third world in the seventies. I keep reading comparisons between the U.S. of the 70s and the U.S. of 2008, but I think the real comparison should be between the U.S. of 2008 and, say, the Peru or the Brazil of 1979. The fact that, in terms of inequality of income and wealth, we resemble the Brazil of 1979 is a symptom of the deeper changes in the economy, which make the U.S. particularly vulnerable to primary product inflation. This seems to have escaped the notice of the economists, whose free trading models are solely concerned with prices and labor costs, ignoring the enormous role of knowledge in the economic system – a role which is acknowledged every time a company is bought, since what is being bought is, in effect, tacit knowledge as well as assets.

    If we end up having sold our endogenous knowledge capabilities for a mess of houses and high definition tv sets, we are going to be sorry.

  20. Yves Helper-Bot


    Intervention will not stop dollar’s slide
    By Peter Schiff…y/ JG02Dj04.html

    In fact, the United States holds just about 1% of the world’s $7.6 trillion of foreign currency reserves, and our total position amounts to just 2.5% of the total daily volume of foreign exchange trading.

  21. Anonymous

    “Separate but related is an excellent post by Tim Duy, who is sufficiently agitated about the state of affairs to have written on holiday with access only to dial up”

    HAH, I used to walk two miles in the snow to school every day.

  22. Anonymous

    Greenspan, 2005

    … the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.

  23. Yves Smith

    Great comments.

    Sorry you didn’t like Duy’s post, but I thought it made an important point: that supposed experts who study the economy and economic flows not only can be wrong (that part isn’t a surprise) but can be wrong to a man, and when someone comes along who sees what is new/different in the data, they reject it. This isn’t quite Kuhn, since he was talking about bigger paradigms, this is simply reluctance to hear new interpretations of seemingly familiar data.

    And I do think Duy’s sense of agitation was significant. Duy has been wrong on the Fed because he keeps hoping the Fed will follow a more sensible course. And now the Fed lacks good choices. Raising rates could wreak havoc with ARM-holders (the peak month for subprime resets is August; I’ve seen research reports that contended that the rate cuts did prevent a good deal of payment shock) but we have costly oil, exacerbated by a weak dollar, taking a big toll on the economy.

  24. Aaron Krowne

    > Yves here, I don’t buy the latter view at all, that companies will put through price increases beyond what they really need to. A weakening economy does not give merchants pricing power.

    Doesn’t this just imply that after an inevitable wave of bankruptcies, prices will then go up? It seems to me that the inflation will pass through, even if commodities prices correct significantly from current levels.

  25. ScottH

    “In fact, the United States holds just about 1% of the world’s $7.6 trillion of foreign currency reserves, and our total position amounts to just 2.5% of the total daily volume of foreign exchange trading.”

    Scary, very scary. That’s a lot like being leveraged to the hilt.

    Also, good post William Wexler.

  26. Yves Smith


    I agree that commodity price increases will get passed through, probably after a lag as per the food producer example. Look, even refiner margins are badly squeezed.

    Remember corporate profits have been at an all time high as a % of GDP. Many companies have more room than they like to admit to sacrifice margin.

    The point the Bloomberg source was making was that companies would avail themselves of the opportunity to increase prices due to diminished competition from imports. That’s the part of the argument I have trouble with. I see consumer demand being too weak for producers to try anything other than input-cost-driven price increases.

  27. jm

    A few months ago I read, IIRC, that something like $80 billion had been pulled out of US mutual funds by individual investors. On the other hand, a good friend who is a retired corporate executive is still optimistic about long-term market prospects and shifted funds from bonds into stocks at Dow 13,000 — he thinks even if my bearish predictions turn out correct it will only be a case of a stopped clock being right twice a day, and that if there is such a sharp decline the market will bounce back and make those Dow-13,000 buys the right decision.

    And, indeed, did not the markets (excepting the Nasdaq) bounce back nicely from their post-bubble lows?

    In both the stock and the real estate markets, most of those few people who can remember the declines of the past also remember that they were followed by even greater gains.

    It may be that the after the mutual-fund outflow people with that complacent outlook are a much larger fraction of the investing populace.

  28. Yves Smith

    “Bounce back” is not the phrase I’d apply to the dot-bomb stock market. If you look at the table of postwar bear markets courtesy Barry Ritholtz, it was 546 days to the end of that bear market.

    Stocks were once regarded as speculative. A reader pointed out that JP Morgan in the early 1980s deemed them as unsuitable for trust fund clients. Veteran investor Peter Lynch once said that when equities were regarded as safe was when they were the riskiest investment, and when they were seen as risky was when they were safest.

  29. Anonymous

    I would hope Tim Duy’s been wrong on the Fed because he’s misread them – not because they don’t do what he thinks they should do. That may be true also, but surely that’s not the criterion for being vigilant on ‘Fed Watch’. We all are entitled to our opinion on the best course of action, including the Fed.

    His work is fine, but prediction is a public and risky business.

  30. Yves Smith

    Sorry, what I wrote about Duy may have been inapt, but when his calls have been wrong, the pattern has often been that (within the bounds of likely choices) Duy has come down on the side of what he has seen as the most sound option, and has often underestimated the Fed’s propensity to be highly sensitive to the expectations of the markets, as reflected in Fed funds rates, and/or worries about taxing stressed financial institutions.

  31. Juan


    While not in relation to GDP, Paul Kasriel’s 26 June, 2008, commentary NIPA Corporate Profits – Thank Goodness for Weaker Dollar might be worth looking at re change in nonfinancial corporate profits.

    I am confident that U.S. nonfinancial profits did substantially improve following their 1997-2003 slump, but never arrived at the advertised all time high as % of GDP. (Ideally we would look at total profits relative to the total mass of capital required)

  32. Anonymous

    The retired corporate executive might consider that according to WSJ’s Marketbeat, the S&P 500 had a negative return for the last decade adjusted for inflation and dividends.

    That seems to disprove the idea that stocks have been such a great investment. It might mean they are a buy now, but the post says capitulation has yet to come.

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