Weakness In GDP Continues (X-M)
This mornings report on the trade deficit certainly doesn't bode well for GDP in the next few months. US imports surged even as US exports rose to a record $172.7 billion. However, the story here is the subtraction in the Gross Domestic Product by the rise in imports.
GDP = C + I + G + (X-M)
Where: C = Consumption
I = Private Investment
G = Government Spending
X-M = Net Exports (Exports - Imports)
Since GDP is the measure of the goods and services we produce domestically we want to take out of the equation the products and services that we import from foreign countries. This is why imports are substracted from exports to get a net total. Therefore, the real story here is once again in imports which jumped by a whopping $220.8 billion, a $10.4 billion jump month over month. The total deficit of $48.2 billion is the highest since the June 2010 spike which hit $49.9 billion. From the release:
"Exports increased to $172.7 billion in March from $165.0 billion in February. Goods were $124.9 billion in March, up from $117.8 billion in February, and services were $47.7 billion in March, up from $47.2 billion in February. Imports increased to $220.8 billion in March from $210.4 billion in February. Goods were $187.0 billion in March, up from $176.9 billion in February, and services were $33.8 billion in March, up from $33.5 billion in February. For goods, the deficit was $62.1 billion in March, up from $59.1 billion in February. For services, the surplus was $13.9 billion, up from $13.7 billion in February."
This will most likely lead to further rounds of Q1 GDP downgrades as this number takes out a few basis points in growth. As we know from China that April exports to the US jumped even more, this import surge will likely carry over into Q2 and result in more GDP cuts.
All in all this does not bode well for the underlying strength of the economy. As we saw with the NFIB report yesterday businesses are more in the "hunker down" mode as too much uncertainty exists in the environment today. Now with the Administration once again talking about raising taxes this puts a larger, as my good friend Sam Malone calls it, "Dome of Uncertainty" in place which keeps forward outlooks weak and capital spending and investment tight - this in turns causes reductions in the "I".
Obama is talking about cutting spending - this subtracts from the "G". Consumers wages are being hit in their pocket book by higher gas and food prices (now 22% of wages of salaries) which subtracts from the "C". As you can see if you subtract from the C, I and the G at the same time that you increasing the M faster than you are increasing the X; well you can see that the math just doesn't work out very well.
All of this confirms two things; 1) GDP will come in weaker than expected by the mainstream media (I know - shocker!) and 2) QE 3 is almost assuredly in the bag by the end of summer.