INDICATOR: January Trade Deficit/Weekly Jobless Claims
KEY DATA: Deficit: $44.4 billion ($6.3 billion wider)/Claims: 340,000 (down 7,000)
IN A NUTSHELL: "While the widening trade deficit is a worry, the real story is the labor market, which if you believe the claims numbers, is getting better by the week."
WHAT IT MEANS: The trade deficit soared in January, even more than most of us expected. But the details were not that bad. The major reason for the increase was a huge rise in oil imports and a drop in exports. The increased U.S. purchases make little sense as our output keeps rising. The only explanation is that there was a large cut in purchases in December, which has no explanation and that the increase in January was just a normal rebound. While that volatility may have an impact on GDP growth, as it raised fourth quarter numbers but will restrain the first quarter rise, it is largely irrelevant. Indeed, oil related products constituted all the increase in imports. Our purchases of consumer goods and vehicles fell but capital goods demand rose. On the export side, the situation was quite positive. We sold a lot more food, vehicles, capital and consumer goods. That is good news and indicates that the world economy may be improving. Looking at our trade with other countries, Europe remains a problem as we sold less to the Continent. As for China, it is trying to fund its recovery in no small part by purchasing less to us but selling more. Not a surprise there given Europe's problems.
Looking at the labor market, the continued trending downward in jobless claims points to better job gains ahead. It is clear that businesses are still hiring. While Challenger, Gray and Christmas indicated that planned layoffs rose in February, they are still down from last year. The financial sector is the problem as it continues to restructure to account for changing conditions and regulations. Otherwise, layoffs are not a major threat.
MARKETS AND FED POLICY IMPLICATIONS: It is always better that the trade deficit narrows rather than widens so it is hard to discount the January numbers. But when you see such an odd pattern in one component, as we did with petroleum, you just chalk it up to temporary factors. Nevertheless, trade is likely to restrain growth this quarter. When you add to that the impact from sequestration, there are two major hurdles to clear if the economy is to accelerate. It does appear that consumers are still buying and if job gains are holding up, it is likely that investment remain solid. But it will be months before the impacts of sequestration are felt and that raises questions more about the second and third quarters of the year than the first. Meanwhile, the markets have tomorrow's employment report to think about. If the claims numbers are any indication, it could be better expected.