INDICATOR: November Trade Deficit
KEY DATA: Deficit: $-34.3 billion ($5 billion narrower); Exports: +0.9%; Imports: -1.4%
IN A NUTSHELL: "The narrowing trade deficit should help power the final quarter to better growth than had been feared and that should give new Fed Chair Janet Yellen some wiggle room as she starts the tapering process."
WHAT IT MEANS: The robust 4.1% summer growth rate was hyped by a huge increase in inventories. It is likely that much of that stock building was unintended and would be worked off in the current quarter, slowing growth sharply. While that still may happen, there are growing signs that fourth quarter growth could come in better than expected and one of the key factors should be a narrowing trade deficit. The chasm closed quite a bit in November as exports rose while imports were down. Our purchases of foreign products moderated largely because of a decline in the demand for petroleum products. The booming domestic energy sector is helping growth dramatically by keeping dollars here. Meanwhile, purchases on non-petroleum products rose, a sign of increasing consumer and business demand. As for exports, sales of industrial supplies, capital goods and even consumer goods - if you exclude artwork and gems - improved. That points to improving conditions in the rest of the world. So far, the final quarter trade deficit has narrowed about six percent from the third quarter and if that is sustained in December, should add significantly to GDP.
On the housing front, CoreLogic reported that the robust price increases we had been seeing may be a thing of the past. Home values rose only 0.1% in November though excluding distressed houses, they were up slightly more, 0.3%. Over the year, home prices surged 11.8%. It is doubtful we can come close to that increase this year.
MARKETS AND FED POLICY IMPLICATIONS: Congratulations to Janet Yellen. The Senate finally confirmed her nomination, not that anyone should be surprised. But the new head of monetary policy, who will officially take over on February 1st, has a huge job ahead of her. She has to transition form crisis mode to normal policy and that will be tricky. What will help more than anything else is continued solid economic and job gains. Today’s trade report should dispel worries that fourth quarter growth will be really weak. It may not be robust but it should exceed 2% and set us up for even better growth this year. But the key will be wage gains that actually exceed inflation, so Friday’s jobs report remains the number to watch. We need the unemployment rate to decline consistently and the excess supply of labor to disappear if worker compensation is to accelerate. As usual, I am near the top of the forecasters for this year and I think we could be at a point where firms have to start bidding for workers again by the end of the summer. That is when the economy will really shift gears. As for investors, they need proof that the economy can grow fast enough to sustain these high stock valuations and a narrowing trade deficit can only boost confidence that this year could be decent.