Trade deficit shrinking
Economics in a nutshell: The sharply narrower trade deficit likely means spring growth was stronger than initially estimated.
Trade deficit shrinking
INDICATOR: June Trade Deficit/CoreLogic Home Prices
KEY DATA: Deficit: $34.2 billion ($9.9 billion narrower)/CoreLogic Prices: +1.9%
IN A NUTSHELL: "The sharply narrower trade deficit likely means spring growth was stronger than initially estimated."
WHAT IT MEANS: I frequently caution that people should not jump to conclusion just because an economic number comes out weaker or stronger than expected. That is especially true of data that use partial samples for the first estimate and build up the total information over time. That is the case with the employment numbers and it is especially true with GDP data. Today's release of the June trade deficit adds to the available information and boy did the situation turn around sharply. Instead of widening, it now looks like the second quarter trade deficit narrowed. This could add as much as one full percentage point to growth. So the weak number may turn out to have been pretty good. In June, imports declined led by large drops in petroleum, cell phones, food and cell phones. There was a rise in capital goods, a sign that businesses are still investing. Meanwhile, exports were up solidly in all categories except vehicles. We even sold more to Europe, despite its economic problems. And wonder of wonders, even the trade deficit with China fell, though I doubt that will continue.
On the housing price front, it looks like home prices rose again in June. CoreLogic indicated the increase was strong. However, an initial report by Trulia suggested that the price gains might be slowing. These dueling reports may be the first sign that conditions, which are still strong, are starting to cool off a bit.
MARKETS AND FED POLICY IMPLICATIONS: Since we are focused on the question of when, not if, tapering will begin, it is important to have some idea about the strength of the economy. The first reading of spring growth was disappointing. The second reading, which will be released on August 29th, may tell a somewhat different story. If it does, then those that believe tapering will start in September will be raising their voices. I still think that even with a 2.5% or more GDP number the Fed would be wise to wait a while. I just don't get the rush to move since I cannot see where inflation will come from. But I don't count so I will not rule out a September announcement. I just hope it doesn't happen. As far as investors are concerned, the battle is between those who fear tapering and those who welcome it. The markets have to be weaned from the Fed's support but only when the economy can make up for that withdrawal. Since it is unclear if the economy is ready, expect market volatility since who knows what will be the full impact on growth, interest rates and therefore earnings if the Fed moves in September. But at least inflation will not be a problem.