Trade Deficit Points To Sub-1% 2nd Qtr GDP
With the release of the most recent trade data we can begin to tighten up our expectations for the 2nd Quarter GDP revisions that are coming up soon. As we already know by the recent drag of the manufacturing data and personal income data the recent spate of economic weakness appears to be more than just a "soft patch" which has been the line of most economists.
Let's remember that the formula for GDP is C+I+G+(X-M) where C=consumption, I=investment, G=government spending and (X-M)=net exports (exports-imports). We have already seen the Government contracting on their spending though the recent reduction in government jobs in the recent jobs data and with the Administration currently engaging a bipartisan commission to cut more spending this is going to be a further drag on GDP. However, the trade data is also a big component of that number and the recent release doesn't bode well for economy in the coming quarters.
Despite help from lower oil and commodities prices the trade deficit worsened further in June to $53.1 billion, following the unexpected ballooning of the gap the month before to $50.8 billion (originally $50.2 billion). The June gap was, for most economists, wider than expected.
Here are the important points to note. Exports dropped 2.3 percent after slipping 0.5 percent in May. Translation: Foreign consumers are purchasing less. Imports dipped 0.8 percent, following a 2.9 percent jump the prior month. Translation: U.S. consumers are purchasing less.
Furthermore, the jump in the trade deficit was led by the nonpetroleum gap which widened to $36.9 billion from $33.7 billion in May. If we look at end use categories for goods, exports fell 3.2 percent while imports declined 1.0 percent in the latest month. The decrease in exports was led by a $2.0 billion fall in industrial supplies, with declines also seen in capital goods excluding autos (down $1.5 billion) and foods, feeds & beverages ($0.8 billion). Modest gains were seen in consumer goods (up $0.7 billion) and automotive (marginally above zero).
Overall, the numbers aren't great and show a slowing economic environment both domestically as well as internationally. The problems in the Eurozone, the slowing in China and other emerging countrie as well as domestically means a slower economy in coming quarters.
GDP Downward Revisions Coming
The Bureau of Economic Analysis (BEA) just recently released revisions to the previous GDP data ratcheting down 1st quarter GDP from 1.8% to just 0.4%. The 2nd quarter GDP currently stands at 1.3% which was much weaker than the 1.9% that was expected and in line with our estimate of 1.25-1.5%.
With the recent spate of economic releases we can now start to prepare for revisions to 2nd quarter GDP to come in at our target of .75% to 1% growth in the next revision with a final revision closer to the bottom of our range. The 3rd quarter is likely to come in just as weak and we will start putting together estimates in the next month or so.
Furthermore, the trend of Exports and Imports, as we said previously, tell us a lot about the trend and direction of GDP. Currently that trend is grinding towards negative which also aligns with our premise of a second recession by the end of this year or early in 2012. (Barring QE3 of course.)
SMRA published even uglier numbers than us - see we aren't all that bearish::
"According to the source data from the advance estimate of second quarter GDP, BEA had calculated a roughly $49.7 billion June trade deficit. The wider figures from the actual June data will likely provide a smaller than estimated contribution to Q2 GDP. In fact, we suspect GDP will be revised downward to around 0.5% from the 1.3% advance estimate."
However, don't despair, the media bulls will even spin this as a "bullish sign" as the economy will have gone from 0.4% growth in the 1st quarter to 0.5% in the 2nd.
The reality here, as stated previously, is that all signs point to further and more pervasive economic weakness. While the slate of mainstream economists, the Federal Reserve and the White House keep insisting the better economic numbers are to come in the 2nd half of the year - there seems to be only one question to really ask: Where is it going to come from?