So many surprises - this time the trade deficit

Wednesday, May 11, 2005

After last week's surprise in the employment figures, questioned by Barry Ritholtz in this post, the surprises don't stop there. Virtually all analysts had expected the US would hit another record trade deficit in March, resulting in a consensus estimate of 61.5 billion after a deficit of 61 billion a month earlier. The press release of the Bureau of Economic Analysis (BEA) reported much better numbers though with the trade deficit much lower at 55 billion dollars and revising the February figure down to 60.6 billion dollars. Exports were 1.5 billion more than February exports of 100.7 billion, imports were 4.1 billion less than February imports of 161.2 billion. The most closely watched detail figure, the deficit with China, came in one billion less at 12.9 billion dollars, attributed to airplane orders. All these positives, and Wall Street seemed not to take notice of it, declining up to 0.7 percent after a shortlived blip to the upside at the market's opening, before recovering on the back of sudden strong declines in oil prices. Are there other forces at work?
CalculatedRisk noted in this post ahead of the release that oil imports were likely to rise from 14.9 to about 20 billion dollars, relying on the Department of Energy's quote that there was "no moderation in volumes". Actual BEA figures show that oil imports rose 7.9 percent to 420 million barrels in March month-on-month, while the cost of these imports rose 20.1 percent to 18 billion dollars, resulting in a unit price of 41.14 (previous 36.85) dollars per barrel. Look at this chart at CalculatedRisk.
The deficit incurred from vehicle sales and auto parts stayed overall on the same level. Exports rose 14.3 percent to 8.9 billion while imports rose 8.2 percent to 20.7 billion, resulting in an almost unchanged deficit of 11 billion dollars.
Advanced Technology Products show a smaller deficit of 1.5 billion vs. 3.4 billion a month earlier. For all other details click here.
Observers were quite baffled on the huge and completely unexpected drop. Overhearing Bloomberg TV while typing this there was a quote saying these figures might just express a lower inventory build-up in March and will therefore only be temporary. Other analysts confirmed this view that the improvement will only be temporary.
I am adding in that the trade figures are only census based. One can call it also pro forma, something companies in trouble prefer to state in comparison to audited GAAP numbers. This leaves wide room for accounting "adjustments."
Most lies are told before elections, during a war and after the hunt (Otto von Bismarck)
There is a big discrepancy between the feeling of market participants and analysts, who are all quite cautious about the outlook for the US economy, and these recent sudden positive spikes in key economic indicators, just when the markets need it most.
A look into history does not bode well. President Richard Nixon, not exactly known for his honesty, had cooked the employment reports of his era by publishing either the non-adjusted or the seasonally adjusted as headline, whichever looked better. He was, like the current men in the White House, inconveniently bothered by a declining economy and a war that did not go well. And markets react on headlines, not the 18th table in a set of statistics that might point to underlying problems.
Current inflation figures, the single most important number for markets, are tampered with by hedonic adjustments in the US and reindexing in Europe. Winston Churchill once said he'd only believe in statistics he falsified himself. Given the bad record about the reasons why Iraq was invaded - ahem, liberated - by the current US government and the worries of former Fed chairman Paul Volcker about "the lot of dollars we recently printed", the suspicion that not everything a government says is true cannot be pushed into the corner of the paranoics. Market movements are too volatile for this excuse. To quote the founder of the German empire and its first chancellor, Otto von Bismarck, most lies are told before elections, during a war and after the hunt. And whenever there is trouble around the corner, be it on the personal, the corporate or the government level, the first inclination is to try to broom it under the carpet. All action is still based on instincts that have been dominating us since the beginning of mankind.
Looking again at the only slight rise in exports, a good part of it coming from services, the huge energy problems discussed in earlier posts, rising inflation despite hedonic adjustments, yesterday's approval of another 82 billion dollars for the war in Iraq and no end of this one in sight, one has reason to wonder how strong the American economy really is, looking at 8 trillion dollars of debt, a quarter of it attributable to the reigning government. Rising foreclosures in California are the first sign that the housing boom might come to an end exactly at the point of time when interest rates are expected to rise. The steady unemployment figures do not lighten up the perspective either. As they are only based on telephone interviews with 60,000 households or 0.021 percent of the population, they do not really fulfill expectations of a sound statistic because of such a minuscule sample.
All that does not add up to a sound economy in my view.

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