Washington's budget deal to increase spending by
$400 billion over the next two years is the latest test of traditional
economic prudence. Increased government spending will join another
increasing stress, that is the nation's appetite for foreign goods.
Whether sports cars or household basics, consumer loyalty to foreign
brands is, at least for the GDP account, burying the strength in
exports.
The economy
In
bad news for fourth-quarter GDP revisions, the nation's trade gap
widened sharply in December, totaling an unexpected $53.1 billion for
the deepest gap of the expansion and $8.5 billion deeper than December
2016. December imports swelled by $6.3 billion to $256.5 billion
(tracked in the red area) and are a direct subtraction from GDP. The
good news is a solid $3.6 billion monthly rise in exports to $203.4
billion (blue area) which, in a partial offset to imports, will add to
GDP. For 2017 as a whole, the deficit came to $566 billion for an
average of just over $47 billion per month.
Turning
to percentage change, year-on-year imports (tracked in the red
columns) increased by 9.6 percent in December and are trending higher
while year-on-year exports (blue line) rose 7.3 percent and are also
trending higher. The clear trouble spot on the import side is consumer
goods, up a year-on-year 12.4 percent in December. In dollar terms,
imports of consumer goods totaled $55.5 billion in the month and for
2017 as a whole, came to $605.2 billion.
Country
totals are in for full-year 2017 and the goods deficits are sizable:
China up 8.1 percent on the year to $375.2 billion; EU up 3.2 percent
at $151.4 billion and centered with Germany but also including a sizable
deficit with France; Mexico up 12.2 percent at $71.1 billion; Japan up
fractionally at $68.9 billion; and Canada up the most by far in
percentage terms, 63 percent higher to $17.6 billion. Keep these
results in mind as trade policies, especially NAFTA negotiations,
unfold through the year.
These
swamping totals for imports drown out what are strong results for
exports. The graph tracks the blue columns of capital goods exports vs
the green line of the trade-weighted dollar. The lower this line goes,
the more affordable U.S. goods are to foreign buyers and the higher the
blue columns should climb. And for foreign buyers, it's the nation's
capital goods, like machinery and aircraft, that are most in demand,
totaling $47.4 billion in December and $533.5 billion for all of 2017.
In year-on-year percentage terms, capital goods exports are rising at a
respectable mid-single-digit pace. These readings are confirmation of
the nation's central strength and a good one to have -- high end
industrial goods.
The
export of services is another strength, totaling $711 billion last
year and rising at nearly at just about the mid-single-digits. Here
too, strength is at the high end, that is demand for U.S. technical and
managerial expertise. The export index of the ISM non-manufacturing
report has been correctly signaling this rising trend though at a much
more significant rate of growth. The over-performance of small sample
surveys has been a consistent feature of economic data over the last
year which brings us to a key component of the ISM report and also turns
our focus to the week's labor indications. ISM's non-manufacturing
employment index has been taking off, up more than 5 points in January
to a very rare plus 60 score of 61.6 for what is by the far the best of
the post-2008 expansion. Had this reading come out before the prior
week's employment report, expectations would have risen for January's
results which in fact did prove strong. The graph tracks the blue line
of the index against the green columns of actual payroll growth
excluding manufacturing which came to 185,000 in January.
Month-to-month growth is the uninterrupted theme of this graph though
actual growth, unlike ISM, is not accelerating. Why the difference?
Perhaps general optimism and the economy's momentum are encouraging
greater participation among ISM's volunteer panel. Either that or
actual payrolls, perhaps, are set to accelerate in line with the ISM.
But
there's one report that is not pointing to acceleration, at least at
the headline level. Openings in the government's Job Openings and Labor
Turnover Survey (JOLTS) are clearly slowing, down 2.8 percent in
December to 5.811 million which was well below Econoday's low estimate.
This was the third monthly decline in five months and pulls down the
year-on-year gain to what is still, however, a healthy 4.9 percent.
Hires are steady, down fractionally in the month to 5.488 million and
keeping the spread with openings also steady, at 323,000. But, in a sign
of strength, quits are on the rise, at 3.259 million for a 3.1 percent
December gain that lifts this year-on-year increase to 5.6 percent. In
theory, increases in quits could suggest that workers, growing more
confident, are switching jobs for higher pay. With market attention
focused on wage inflation, the quits reading of this report is
something to keep our eye on.
But
there is one single indication that shows how strong demand for labor
is, specifically how low layoffs really are. Initial jobless claims have
posted four straight very favorable readings, at 221,000 in the
February 3 week which pulls the 4-week average down to 224,500 for a
new 45-year low. This is a very early indication of strength for the
February employment report. Other readings include low levels for
continuing claims and a very low 1.4 percent unemployment rate for
insured workers (this excludes job leavers and labor market
re-entrants).
We
end the week with a look at the need to restock inventories, a source
of future strength for the labor market. Wholesaler inventories rose a
modest 0.4 percent in December to $612.1 billion, rising in line with
manufacturer inventories and a bit faster than retailer inventories
which are flat. Final numbers are still coming in but the inventory
build during the fourth quarter looks to have slowed to a quarterly 0.6
percent increase from a 1.2 percent rise in the third quarter. Slowing
inventory build is a negative for GDP but, when demand is strong as it
is now, it is a positive for production and hiring. How strong is
demand? Sales at the wholesale level were up a year-on-year 9.1 percent
in December compared to only a 3.4 percent increase for inventories.
The stock-to-sales ratio is at 1.22, down from November's 1.23 and vs
1.29 in December last year.
Markets: Is the room spinning or is it me?
What
makes the ongoing wobble less frightening is the absence, at least so
far, of counter-party failure and cascading defaults. January's surge in
Treasury yields, including a 30 basis point jump for the 10-year, is
cited as a trigger for the ongoing trouble, a rise tied to strong
economic growth, the risk that wage inflation will finally emerge, and a
resulting move by the Fed to increase rates more energetically than
expected. These issues have moved the market's focus away from profit
and toward security, a factor that ironically, as buyers bid down
yields, is now holding down the increase in Treasury rates. At 2.86
percent, the 10-year yield rose only 2 basis points despite the
fireworks in the stock market. And the 2-year yield actually retreated
this last week. But a new rise in government spending and a sudden
reduction, at least initially, in tax receipts points to an
accelerating rise in Treasury issuance which can't be good for value.
Not to mention that the Fed, in its balance sheet unwinding, is cutting
back its own bond buying efforts at an increasing rate. Yet U.S.
Treasuries are nevertheless a safe place to keep money and may prove
especially attractive, given much lower yields in Europe and Japan, to
foreign accounts.
After
daily swings consistent with heavy nausea, the Dow ended the week at
24,190 for a 5.2 percent weekly loss following the prior week's 4.1
percent dip. The good news is that the year-to-date decline is still
limited, at 2.1 percent. Oil was really hit, down 9.1 percent in the
week to end back under $60 at $59.23. Gold is doing better, down only
1.1 percent at $1,317 as is the dollar, up 1.4 percent in the week to
trim the 2018 loss to 2.0 percent.
Markets at a Glance | Year-End | Week Ended | Week Ended | Year-To-Date | Weekly |
2017 | 2-Feb-18 | 9-Feb-18 | Change | Change | |
DJIA | 24,719.22 | 25,520.96 | 24,190.90 | -2.1% | -5.2% |
S&P 500 | 2,673.61 | 2,762.13 | 2,619.55 | -2.0% | -5.2% |
Nasdaq Composite | 6,903.39 | 7,240.95 | 6,874.49 | -0.4% | -5.1% |
Crude Oil, WTI ($/barrel) | $60.15 | $65.13 | $59.23 | -1.5% | -9.1% |
Gold (COMEX) ($/ounce) | $1,305.50 | $1,332.70 | $1,317.50 | 0.9% | -1.1% |
Fed Funds Target | 1.25 to 1.50% | 1.25 to 1.50% | 1.25 to 1.50% | 0 bp | 0 bp |
2-Year Treasury Yield | 1.89% | 2.14% | 2.07% | 18 bp | −7 bp |
10-Year Treasury Yield | 2.41% | 2.84% | 2.86% | 45 bp | 2 bp |
Dollar Index | 92.29 | 89.16 | 90.4 | -2.0% | 1.4% |
The bottom line
Exports are on the rise which reflects building
global demand and what, overshadowed by the increase in imports, is a
hidden strength for the economy. Another hidden strength is the need to
restock inventories which highlights the economy's central feature:
strong demand for labor. Ultimately, it's the play between labor
strength and Federal Reserve policy, that is wage gains vs the risk of
increasing rate hikes, that has captured the attention of the financial
markets.
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