Inventory-Building Masks Stagnant 3rd Quarter GDP

October 30, 2010

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The Bureau of Economic Analysis released its first preliminary estimate of U.S. Gross Domestic Product (GDP) on Friday morning.  (Link provided above.)  GDP grew by 2.0%, a marginal improvement over the 2nd quarter final reading of 1.7%.  Inventory-building added 1.44% to GDP.  That’s not good.  Inventories can’t grow indefinitely and, at some point, are corrected with inventory reductions.  Strip out inventory-building and GDP rose by only 0.56% – less than the rate of population growth.

Before going further, I should point out that all of these numbers are dependent on the government’s estimate of inflation, or what they call the GDP “deflator.”  GDP actually rose at an annual rate of 4.2%, but the government estimates the GDP deflator to be 2.2%.  Thus, “real” (adjusted for inflation) GDP rose at an annual rate of only 2.0%.  What if the government underestimated inflation and its effect on the cost of living?  The numbers would show “economic growth” but everyone would be getting poorer.  I point this out just to illustrate how questionable these numbers can be.

With that said, factoring in population growth of about 1% per year, real per capita GDP rose at an annual rate of about 1%, little changed from the 2nd quarter.  With stimulus spending factored out, it actually rose at much more robust pace of 4.5%.  But that’s a technicality, caused by a huge downward swing in stimulus spending from the previous quarter.  As you can see from the following chart, real per capita GDP with stimulus spending factored out has been bouncing up and down (likely due to lags in reporting on stimulus spending), but shows no upward trend.  In other words, the stimulus spending halted a cataclysmic decline in GDP and stabilized it, but there’s no evidence of growth.  And the stimulus spending will soon be coming to an end. 

Real Per Capita GDP

This is why the Fed is so worried about prospects for the economy and is widely expected to start pumping billions more into the economy.  More on that in the next post.

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Are Candidates “China-Bashing Xenophobes?”

October 29, 2010

http://blogs.reuters.com/columns/2010/10/27/u-s-elections-exacerbate-tough-china-relations/

Thought you’d be interested in the above-linked commentary by James Pethokoukis that appeared on Reuters yesterday, and the comment I submitted in response.  (Scroll down a few comments that follow the article.)  Also, I found the general tone of the vast majority of responses encouraging.


Vote on Tuesday

October 26, 2010

I was actually planning to  publish a post titled “Vote on Tuesday?  Don’t Bother.”  Both parties run on platforms designed to energize their base and then, when elected, move toward the middle.  The result is that both parties are indistinguishable and nothing ever changes, at least not on the critical issues of immigration and trade.

Then this came in the mail yesterday:

It seems that Lance Enderle is running to replace incumbent Mike Rogers in Michigan’s 8th Congressional District.  Since moving to Michigan in ’01, I have supported Republican Mike Rogers because of his opposition to illegal immigration and amnesty for illegals.  But, like virtaully all Republicans and Democrats, Mike was a staunch supporter of free trade.  So I had to hold my nose each time I voted.  Besides, Mike’s opposition to illegal immigration was more passive than active.  Being in a “throw the bums out” frame of mind, I’d probably have voted against him this time around anyway. 

As you should know by now, there are only two issues that I believe affect the direction of this economy – trade and immigration.  Everything else is a side-show that ultimately has little impact on our economy.  Since both parties generally support high rates of immigration and free trade, I’ve had no enthusiasm for this election.  They’re all the same and no one is going to take a stand on these issues. 

But, as you can see, Lance Enderle has clearly stated his belief that NAFTA (North American Free Trade Agreement) should be repealed, and he believes in raising tariffs on all imports.  While that actually goes further than I would (I’d only raise tariffs on manufactured imports from overpopulated nations), it’s a step in the right direction.  Tariffs on all imports would be better than what we have now.  At least now I have a reason to go to the polls on Tuesday.  And, if Enderle is elected, at least we’d have one advocate for sensible trade policy in Congress.  If he makes it, I hope he doesn’t disappoint me on these promises in the way that Obama did.


Obama Backs Down on China Currency

October 19, 2010

http://www.reuters.com/article/idUSTRE69E0OB20101016

Just about the time you think the Obama administration may be growing a backbone in dealing with China ….. well, no.  Once again, they’ve chosen to duck and cover, leaving American workers to take the brunt.  The administration has decided to hold off on issuing a report that would brand China a “currency manipulator,” opening the door to corrective tariffs.  (See the above-linked Reuters article.)  It seems that Obama wants to hold off at least until after the next G20 meeting in November, giving a “multi-lateral” approach another chance.  Earth to Obama:  the U.S. trade deficit with China isn’t a multi-lateral issue.  Aside from the U.S. and China, none of the other 18 in the G20 gives a damn about our trade deficit. 

The issue here isn’t multi-lateralism vs. a go-it-alone approach.  The issue is that this administration hasn’t the courage to take even the simplest of measures in defense of our economy and American workers.  If it doesn’t have the guts to issue a report, what are the chances that they’d have the guts to actually impose tariffs on China and then make them stick? 

President Obama clearly places more importance on diplomacy, on maintaining an air of cooperation at G20 meetings, and on a legacy of being a world-respected statesman than on providing real leadership for the American people.  Maybe this shouldn’t be a surprise, since he vowed to take such an approach during the campaign two years ago.  But he also vowed to tackle the trade deficit and re-write the North American Free Trade Agreement.  Neither has happened, nor will they happen. 

There will be no improvement in America’s trade deficit under this administration.  The president’s plan to cut into the deficit by doubling exports is less of a plan than it is a dodge.  There’s no hope that American manufacturing jobs will be coming home under this administration.  It’s clear that our only hope for “change” will have to wait until the 2012 election.  Obama and his adminstration will have to go.


$US-TWD Exchange Rate vs. U.S. Balance of Trade with Taiwan

October 15, 2010

Continuing my series of examining the effect of exchange rate (or lack thereof) on trade imbalances, I’ll now examine Taiwan, America’s 9th largest trading partner (year-to-date in 2010).  This study of exchange rates vs. the effect on balance of trade couldn’t be more timely, given the escalating currency war that now dominates economic news.

Taiwan is a nation almost twenty times as densely populated as the U.S.  Therefore, my theory of the effect of population density on per capita consumption predicts that we’d have a trade deficit with Taiwan.  We do, and it’s a whopper.  When expressed in per capita terms, our trade deficit in manufactured goods with Taiwan is four times worse than our deficit with China. 

But how has the deficit responded to changes in the currency exchange rate?  Here’s a chart of the data:

$US-TWD Rate vs Balance of Trade

As you can see, in the 16 years covered by this data, the U.S. trade deficit responded to changes in the currency exchange rate as predicted by economists (improving with a falling dollar and vice versa) only 7 times, or 44% of the time.  In other words, the trade deficit in this case was more likely to do just the opposite of what economists predict.  And, when this 16-year period is taken as a whole, we see that in spite of the dollar strengthening over that period, the balance of trade with Taiwan actually improved instead of worsening, exactly the opposite of what one would expect.

So here’s an update of the theory correlation chart with Taiwan included:

Theory Correlation Score

Again, the population density theory continues to be a far better predictor of balance of trade than the exchange rate theory.  So far, of the 12 countries examined, there has been a strong correlation between exchange rate and balance of trade in only two cases – Australia and Colombia, both nations either less densely populated than the U.S. or about the same. 

There are still five nations to go to round out this study of America’s top 15 trading partners and the effect of currency valuation on balance of trade:  The Netherlands, India, Singapore, Venezuela and Saudi Arabia.  In the interest of wrapping up this study, I’ll include all five in the next installment. 

*****

Exchange rate data provided by www.oanda.com.


Obama’s Plan to Double Exports Failing Miserably

October 14, 2010

This morning the Census Bureau released its report of U.S. International Trade in Goods and Services for the month of August.  Here’s a link:  http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

In January, President Obama set a goal of doubling exports in five years, the real goal being, of course, to reduce our trade deficit.  I predicted this plan would fail for two reasons:  (1) The U.S. has no control over exports, and (2) few countries have the ability to expand domestic consumption, which would drive a demand for imports from the U.S. 

Since January we’ve been tracking Obama’s progress on this goal.  The August data makes it clear that he’s slipping far behind.  Here’s a chart of our progress vs. Obama’s goal:

Obamas Goal to Double Exports, 1st year

Seven months into this plan, exports have risen at a pace that, if continued, would increase exports by 72% in five years, well below the goal of 100%.  You may be thinking, “hey, that’s not so bad!  Lighten up!”  Oh, really?  The problem is that imports have increased at a rate that, if continued, would increase imports by 257% in five years.  Doing the math, this disparity in the rates of increase in imports vs. exports will leave us with an annual trade deficit of $2.548 trillion in five years!

Here’s a chart of the monthly balance of trade through August:

Balance of Trade

The following excerpt from the 2nd paragraph of the report pretty much tells the tale:

Exports of goods were virtually unchanged at $107.7 billion and imports of goods increased$3.9 billion to $166.7 billion. 

The president has often blamed the profligate spending of his predecessor for the state of the economy he inherited, knowing full well that the real problem lay with the trade deficit, which exploded in the decade following the granting of MFN (most favored nation) status to China, opening the door to a tsunami of imports.  Obama knows that the simplistic over-spending and deficit message plays better with the electorate.  He asks if we want to go back to the same policies that created this mess in the first place.  The fact is that his failure to take meaningful action on the trade deficit virtually assures another economic crisis.


$US-FRF/Euro Exchange Rate vs. U.S. Balance of Trade with France

October 12, 2010

Continuing my series of examining the effect of exchange rate (or lack thereof) on trade imbalances, I’ll now examine France, America’s 8th largest trading partner (year-to-date in 2010).  This study of exchange rates vs. the effect on balance of trade couldn’t be more timely, given the escalating currency war that now dominates economic news.

France is a nation whose population density is more than three times that of the U.S. and is actually much closer to the population density of China.  Therefore, my theory of the effect of population density on per capita consumption would predict a trade deficit with France.  And that’s exactly what we have.  In fact, expressed in per capita terms, our trade deficit in manufactured goods with France in 2008 was almost exactly the same as our deficit with China.  (It fell in 2009, along with the rest of global trade, thanks to the recession.) 

But how has the deficit responded to changes in the currency exchange rate?  Until 1998, when France joined the European Union and adopted the Euro as its currency, the French currency was the franc.  So the following graph depicts changes in the value of each. 

$US-FRF&Euro Rate vs Balance of Trade

As you can see, in the 19 years covered by this data, the U.S. trade deficit responded to changes in the currency exchange rate as predicted by economists 11 times.  That is, the trade balance worsened when the exchange rate rose (when the dollar strengthened), or improved when the exchange rate fell (when the dollar fell).  However, overall, during this 19-year period, the net result is that the exchange rate with France remained basically flat.  Yet, the balance of trade with France worsened dramatically.  So, when examined on a year-by-year basis, the correlation between exchange rate and balance of trade gets a weak positive score of 0.58.  But the overall effect during that 19-year period indicates that there has been an opposite effect.  The overall trend has been toward dramatic worsening of the balance of trade between the U.S. and France, just as my population density theory would predict. 

So here’s an update of the theory correlation chart with France included:

Theory Correlation Score

Again, the population density theory continues to be a far better predictor of balance of trade than the exchange rate theory.  So far, of the 11 countries examined, there has been a strong correlation between exchange rate and balance of trade in only two cases – Australia and Colombia, both nations either less densely populated than the U.S. or about the same. 

Next up will be U.S. trade with Taiwan, America’s 9th largest trading partner year-t0-date in 2010.

*****

Exchange rate data provided by www.oanda.com.