Net Export Prices Turn Down
There was good news to be had in the September trade deficit report which shows that on balance the improvement in the trade deficit over the last three months will provide a positive contribution to the 2nd revision of the third quarter GDP report. However, a significant part of that improvement appears to have been related to flight to safety (a move into gold) during September's weak financial markets. This will reverse itself most likely in the 4th quarter period.
In that regard the September trade gap shrank to $43.1 billion from $44.9 billion in August. The latest shortfall was narrower than analysts' expectations for a $46.3 billion deficit. The interesting items here, however, are the fact that exports gained 1.4 percent in September after just a small bump of 0.1 percent in August. On the other hand imports continued to struggle, up 0.3 percent in September following a 0.2 percent decline in August, as consumer's retrench in spending on goods outside of utilities, food, energy and medical bills.
The improvement in the trade gap was led by the nonpetroleum goods gap which shrank to $31.5 billion from $33.9 billion in August. Exports of industrial supplies jumped $1.4 billion with $1.6 billion coming from non-monetary gold during the flight to safety. If you strip out the gold component then exports of industrial supplies fell by $200 Million. The petroleum gap worsened to $26.6 billion from $26.0 billion the prior month. The services surplus slipped to $15.8 billion from $16.0 billion in August.
Keeping this all in perspective the trade deficit is still sorely negative and as shown in the chart is really a function of the ebb and flow into, and out of, the U.S. dollar. The other important component to remember is that Europe is very close to a recession and they account for a very important 20% of our exports. The rise in oil prices in the recent month will also impact report as oil imports are a large contributor to the equation. The one big beneficiary to the trade deficit numbers is the contraction of real consumer spending and incomes. The increase in exports is welcome news but would be greatly offset when imports jump due to higher oil prices.
Another real issue of concern is the recent weakness in prices. Negative net export prices have been a good leading indicator of the market and ultimately the economy. As export prices decrease it puts pressure on corporate profit margins and ultimately the market. While recent earnings reports still show good earnings growth at the bottom line, due to cost cutting factors, the top line is getting hit by higher inflationary pressures and lower prices. This renewed downturn in prices may well suggest market weakness in the coming months so we will want to watch for further weakness in pricing.
Going forward the underlying fundamentals still suggest an ongoing deterioration in the U.S. trade balance which implies further complications for the markets and the economy. While this is just one report, when combined with many of the other reports also showing weakness, it does give pause for concern.