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Trade balance (Jun): Deficit widens further

Written on August 8, 2010 by Wiley Hayden


  • FOMC: outlook unusually uncertain and risks to growth weighted to the downside

  • Trade balance (Jun): deficit widens further

  • Retail sales (Jul): moderate rebound due to higher car sales

  • UMI consumer sentiment (Aug): down again, albeit only slightly

The advance GDP estimate for Q2 showed that nonfarm business gross value added increased by 2.6% qoq annualised. According to the labour market reports, aggregate hours worked are likely to have gone up by about the same rate, and thus we expect nonfarm productivity to have remained unchanged at best in Q2. However, given the upward revision to the rise in nonfarm business gross value added in the first three months, we predict that productivity will be revised up for Q1. Employment costs increased moderately in the 2nd quarter, and thus unit labour costs might have gone up by 1.7% qoq annualised. It should be noted that productivity and unit labor costs data will be revised from 2007 on, just like the GDP data recently.

Wholesale inventories could have risen by 0.5% mom in June again, as the inventory build-up has been lagging behind sales up to now. But we already know that factory inventories fell for the second consecutive month, by 0.1% mom after –0.4% mom. Thus we only expect business inventories to have gone up slightly by 0.2% mom in June. The GDP figures for Q2 indicated that the inventory adjustment cycle is in its final stages, and thus inventories will provide less support to growth in the near future.

At this week’s meeting, the FOMC is set to leave the target range for the federal funds rate unchanged at 0–0.25% and remain cautious about the economic prospects. Although the committee will be expecting moderate growth to continue, it could state that the outlook is unusually uncertain at present, with risks to growth weighted to the downside. Underlying inflation could be described as still trending downwards, due to slack labour and production markets. In his congressional testimony, Mr Bernanke talked about the possibility of some further unconventional easing in monetary policy if the economic upswing should stall. However, despite the very slow recovery in private employment, the FOMC is unlikely to announce additional measures after this meeting. But it will reiterate that exceptionally low levels of the federal funds rate are warranted for an extended period.

The trade deficit widened unexpectedly by almost $2bn to $42.3bn in May, as growth in imports exceeded that of exports. The Department of Commerce reported in the advance estimate of Q2 GDP that the real trade deficit had made a negative growth contribution of 2.8 percentage points, due to an acceleration in domestic demand. It was estimated that exports will have fallen in June, whereas imports will have gone up again. The petroleum deficit could have widened somewhat after narrowing in May. Thus we predict that the trade deficit will have increased to $44.0bn in June – the highest deficit since October 2008.

The Congressional Budget Office (CBO) estimates the budget deficit in July at $169bn, $11bn less than the shortfall one year ago. According to the CBO, receipts were higher driven by corporate tax payments, and outlays were lower, particularly due to less spending on the Troubled Asset Relief Program.
The deficit after the first ten months of the current fiscal year would be $1,174bn, a modest improvement of $93bn compared to the same period in the fiscal year 2009.

Import prices, which went down sharply by 1.3% mom in June, could have risen moderately by 0.3% mom in July, partly due to slightly higher petroleum prices. Consumer prices could also have risen by 0.3% mom due to energy: average gasoline prices were stable, but the seasonal adjustment assumes a drop in gasoline prices in the month of July. Food prices could also have gone up after having remained stable for two months. CPI’s annual rate could edge up slightly to 1.2%. But core CPI is only expected to have increased by 0.1% mom, leaving the annual rate just below 1%.

Initial jobless claims rose unexpectedly by 19k to 479k in the week ending 31 July. Generally, claims tend to decline at the end of July when the first automobile firms reopen after retooling. But as there were fewer closings this year, there will also have been fewer reopenings; this will have lead to an increase in claims in adjusted terms. Nevertheless we expect jobless claims to have corrected downwards somewhat to about 465k in the week ending 7 August – still an elevated level which in the past has been associated with declines in nonfarm payrolls.

After two decreases in a row, retail sales are likely to have gone up again in July, particularly because of a marked increase in car sales. Higher gasoline prices in adjusted terms could also have contributed to the rise.
But the unfavourable development of the various consumer confidence indicators suggests that the rebound will probably only have been moderate. We predict that retail sales will have gone up by 0.7% mom in July, but less cars only by 0.2% mom.

The University of Michigan’s (UMI) consumer sentiment index dropped sharply from 76.0 to 67.8 in July, with both expectations and the current assessment deteriorating significantly. We forecast that UMI’s preliminary August consumer sentiment will fall again: the weekly ABC consumer comfort poll has continued to trend downwards at the beginning of August, and the level of the Conference Board’s consumer confidence index is still much lower in comparison. Worries about the strength of the economic recovery and the very slow recovery in the labour market are weighing on consumers at present. However, the fact that the final July index was revised upwards by 1.3 points indicates that consumer sentiment might only have declined slightly this time. We therefore expect UMI’s preliminary August consumer sentiment to have fallen to about 67.0.

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