Weekly Claims and Trade Deficit Not as Good as Reported

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Stocks reacted enthusiastically to the weekly unemployment claims for the week ending September 3rd and to the improvement in the U.S. trade deficit during July. As usual, the mainstream media hyped up the headline number, but 'forgot' to report some important details.

Weekly claims falling the week before or during a major holiday is a hardly unusual and has nothing to do with an improving employment picture. The 451,000 number reported for the week before Labor Day was the lowest number since the week that contained the July 4th holiday. The problem is not that unemployment offices are closed, but the bureaucrats that tabulate the statistics can't work faster to produce the numbers in a timely fashion. In this report, apparently 9 states didn't have their numbers ready, so two of them estimated their numbers and the BLS estimated the numbers for the other seven. This information doesn't appear to have been included in the intitial press release from the BLS. Some bloggers caught on to it though and Bank of America sent out a note later about what had happened.  Stocks in both the U.S. and overseas rallied on the BLS release showing an improving jobs situation based on incomplete data.

The market was also excited about the trade deficit decreasing in July. While no trade deficit is definitely a good thing (something that hasn't occurred in the U.S. since the 1970s), this is not necessarily true for a lower trade deficit. If the trade deficit is decreasing because of surging exports, that is indeed a positive. If it is decreasing because of a big decline in imports, this can indicate business and consumers are spending less because of poor economic conditions. Falling imports accounted for most of the July decrease. Of the increase in exports, capital goods accounted for 82%. This is surprising considering the July durable goods report showed a significant decline in production of capital goods in the U.S. If exports are surging for capital goods, why is production falling?  There seems to be some contradiction here.

The stock market shouldn't have been happy with either of these government reports. Without the positive spin the mainstream media gave them, it probably wouldn't have been. The truth is that weekly unemployment claims have been continually at recession levels for over two years now and there is no evidence yet of their improvement (even a one week drop below the 400,000 recession level, quite possible before the election on November 2nd, wouldn't mean employment is on an upswing). As for the trade deficit, it was cut in half during the Credit Crisis because the economy was collapsing. An improving trade deficit can actually be sending a negative message. Investors need to know the details and the historical context of any given economic report before they can react appropriately to it. Lots of luck in getting that from the mainstream media.


Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

U.S. Trade Deficit - There's Good News and Bad News

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. Trade Deficit dropped by a whopping 29% in November, one of the biggest drops in history, if not the biggest. Much of the 'improvement' was accounted for by price changes in imports (the numbers are not adjusted for inflation or deflation as is the case for most U.S. government economic reports) Nevertheless, both imports and exports declined significantly, indicating a shrinking global economy. Imports of course dropped much more than exports and this took place because of falling oil prices.

Oil prices (the U.S. is a major oil importer) have the biggest influence by far in determining the U.S. Trade Deficit. The trade deficit overall dropped 29% and oil imports dropped by a similar amount. Based on the average price for a barrel of oil used in the report, oil prices dropped 27% during the month, although the report itself states that 'petroleum prices' fell 32%. Imports of industrial supplies, the category in the report that includes petroleum products and natural gas, fell by 25%. Based on these figures it looks like a little less oil is being consumed by the U.S., but not much. Almost the entire change is merely a change in pricing.

On the flip side of the equation, imports were also falling in November, but that decline seems somewhat more related to an actual drop in trade than a drop in prices. U.S. exports of industrial supplies, capital goods, autos, consumer goods, and food and feed all fell. The one significant rise was in the aircraft category, which jumped 7.1%. This was caused by a strike in Boeing ending and should be assumed to be a one-time event. Drops in imports and exports of services were approximately equivalent.

The average price of a barrel of oil used for the November report was $66.72 a barrel and oil has fallen much lower since then. 'Improvements' in the U.S. Trade Deficit are likely for the next few months because of this. As the price of oil gets to its cost of production, the 'improvements' will disappear however. When the price of oil rises again, the 'improvements' will reverse. The drop in U.S. exports is actually the much bigger story. It was a collapse in U.S. exports that was a key marker of the Great Depression in the 1930s.

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Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.