Trade Deficit Exploding

November 5, 2018

So far, the minimal tariffs that Trump has imposed on China (10% tariffs on half of their exports) has been powerless to stop a tax cut-fueled explosion in the trade deficit.  On Friday, the Labor Department released the employment report for October and, once again, it was a strong one.  The economy added 250,000 jobs.  Unemployment held steady, and wages rose at their fastest pace in years.  The economy is doing well, at least better than it has since the U.S. granted “most favored nation” status to China in the year 2000.

However, at the same time on Friday, the Commerce Department released the trade figures for the month of September – the first month that the tariffs were in full effect – and it’s clear that much of the economic stimulus provided by the tax cut that went into effect this year is ending up in the hands of China, Japan and Germany.  The trade deficit in manufactured goods exploded to another new record – $71.6 billion (an annual rate of $859 billion) – blowing past the previous record set only one month earlier.  Look at this chart:  Manf’d Goods Balance of Trade.

This morning, I came across this commentary on CNBC:  https://www.cnbc.com/2018/11/05/us-keeps-cutting-large-checks-to-china-japan-and-germany—commentary.html.  I don’t agree with everything said here, but it’s encouraging to see that people are starting to “get it” when it comes to the trade deficit:

“Those who are sadly and incorrectly arguing that this does not matter should note that America’s trade deficits will be added to its $8.6 trillion of net foreign debt recorded at the end of the second quarter.

That large overseas transfer of American wealth is also a drag on economic growth. In the first nine months of this year, the growth of the gross domestic product was lower than the growth of domestic demand as a result of increasing U.S. trade deficits.”

Finally, someone acknowledging that the trade deficit is the driving force behind our growing national debt.

Trump is exactly right to treat the trade deficit as a national security threat and to begin imposing tariffs on that basis.  So far, however, it’s been too little.  The tariffs need to be extended to all imports from China.  They need to be raised to 25% or more.  And they need to be extended beyond China, to Germany and Japan and anyone else who attempts to prop up their economies at the expense of American workers.  When that happens – when corporations stop seeing tariffs as a fleeting ploy in trade negotiations and instead see manufacturing in the U.S. as a more profitable business model than paying high tariffs – then and only then will trade become more balanced and fair and the trade deficit will begin to decline.

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Economy’s Good, Not Great. Tariffs Not Yet a Factor.

October 20, 2018

I’m back from my annual fall fishing trip up north.  Much has happened and it’s time to get caught up.

The economy’s doing quite well.  In September, the unemployment rate fell yet again to 3.7%.  Economists are wringing their hands over the tight labor market.  Every month, the Federal Reserve proclaims the economy to be at “full employment,” a condition likely to yield rising labor costs, fueling unwelcome inflation.  Yet, every month the economy adds more jobs and somehow manages to find workers to fill them.  Now we’re really at full employment, says the Fed.  Another month.  More jobs added.  “Now we’re really, really at full employment.”  And on it goes.  This supposedly tight labor market is the Fed’s chief justification for raising interest rates.

It’s almost as though there’s a conspiracy to stir up hysteria about an over-heating economy.  On Tuesday, the Fed released its “JOLTS” report of the number of job openings, noting that the number of job listings exceeded the number of people reported to be actively seeking employment.  What they don’t tell you is that that’s perfectly normal.  “Job seekers” is a figure taken from the unemployment report.  But if you’re simply changing jobs and never filed for unemployment, you’re not counted.  Many job opening listings are simply positions opened up by people who have left for other jobs, often because they have decided to simply relocate from one place to another.  It’s a weak measure of the health of the economy.  Nevertheless, ECONODAY had this to say about the report:  “Jerome Powell (head of the Federal Reserve) concedes that it’s a mystery why wages haven’t been going up very much as demand for labor grows and the supply of labor declines. Yet sooner or later, the law of supply and demand is bound to assert itself, at least this is the risk that the Fed is guarding against in its rate-hike regime.”

Yesterday, commenting about the weak report of existing home sales, ECONODAY had this to say: “The lack of wage gains, however, is a negative for home buyers not to mention a great mystery of the 2018 economy given the increasing scarcity of available labor. And another great mystery of this year’s economy is the lack of interest in home ownership.”

Is it a lack of interest in home ownership, or a lack of the wherewithal to buy a home in the face of rising interest rates (driven by the Fed) combined with the “great mystery” of a “lack of wage gains?”  People don’t just lose interest in owning a home.  Everybody wants a place they can call their own.  The problem is that not everyone can afford it.

There’s really no mystery here.  Anyone who has followed this blog or has cast a cynical eye on the employment statistics ever since the “Great Recession” knows that the unemployment rate is completely bogus, driven down artificially by the Labor Department claiming that people have dropped out of the labor force.  During the Obama administration, 6.4 million workers mysteriously vanished.  Since Trump took office, that figure has shrunk by over a million workers, but an honest tally of the unemployed still stands at 11 million workers (including those who were unemployed before the “Great Recession”) and unemployment is actually at 6.6% instead of 3.7% – a rate nowhere near low enough to begin driving wages higher.  Per capita employment remains exactly 1% below the level it was at before the onset of the “Great Recession” – a figure that was already depressed.

So the economy is doing well – better than it has done in the past ten years – but that’s not saying a lot.  The tax cut that went into effect this year gets the credit, but that will only carry the economy so far.  To keep it going – to accelerate the economy even further – we need progress toward cutting the trade deficit, especially the deficit in manufactured goods.  The Trump administration has made a lot of moves in that direction, imposing 10% tariffs on steel and aluminum, tariffs on $25 billion of Chinese imports, followed by 25% tariffs on an additional $225 billion of their imports, the renegotiation of the North American Free Trade Agreement (NAFTA) and threats to impose tariffs on all auto imports.

But there’s no evidence of any improvement in our trade situation, at least not yet.  The most recent trade data show that the rapid erosion of American manufacturing continues, yielding a trade deficit of $70 billion in manufactured goods in August – a new record – with new record trade deficits with China and Mexico.

That’s not an indication that Trump’s tariffs are a failure.  Aside from the small tariffs on aluminum and steel, none of the above-mentioned initiatives have taken effect yet.  The biggest chunk of the tariffs on China went into effect in September, so the effect on trade with China won’t show up until new trade data is released next month.  The “USMCA” agreement – the replacement for NAFTA – hasn’t been enacted yet.  And the trade deficit with China was artificially swollen by a rush to beat the tariffs.

It’s going to take a lot of patience to realize the real benefits of Trump’s trade policy.  The purpose of tariffs is to provide an incentive to manufacture products domestically.  The immediate effect will be to raise prices for American consumers, just as economists have warned.  Longer term,  companies will begin to realize that they can improve profits by manufacturing in the U.S., thus avoiding the tariffs.  It’s going to take time for that realization to sink in, and time for companies to implement plans to build factory capacity in the U.S.  Ultimately, when that capacity comes on line, we’ll see a real boom in the demand for labor and a corresponding rise in wages, more than offsetting any increase in prices.

Hopefully, the Federal Reserve won’t torpedo the economy in the meantime.  It can’t have any impact on price increases driven by tariffs, so it would be pointless to even try.  All they can do is drive the economy into recession with their high interest rates, raising doubts about the president’s economic policies, and increasing the chances that America will shrink back into its role as host in the global host-parasite trade relationship.  That would be a disaster.

Again, it’s going to take time and patience.  It took seven decades of globalism (beginning with the signing of the Global Agreement on Tariffs and Trade – GATT – in 1947) to get us into the fix we’re in.  It’s going to take more than a year or two to get us out.


Tariffs on China!

September 19, 2018

https://www.reuters.com/article/us-usa-trade-china-tariffs/china-says-trump-forces-its-hand-will-retaliate-against-new-u-s-tariffs-idUSKCN1LX2M3

Monday evening, President Trump took the first meaningful step to extricate the U.S. from its decades-long trade policy nightmare that has wreaked havoc on the American people and economy.  He imposed a 10% tariff on $200 billion worth of imports from China, adding to the similar tariff he imposed earlier this year on $50 billion worth of Chinese imports.  His goal is to eliminate America’s massive trade deficit with China and restore a balance of trade.  When the Chinese failed to respond to the initial round of tariffs with voluntary measures to re-balance trade, the president was left with no choice but to take steps to assure that it happens.

Chinese reaction, and reaction by pro-trade lobbying organizations, has been predictable.  China threatened retaliation and yesterday announced small tariffs on $60 billion of U.S. exports.  Why only $60 billion?  Because that’s all that’s left after they already imposed tariffs on U.S. exports in response to Trump’s first round of tariffs.  In essence, they’re already out of ammo in the trade war.  Commerce Secretary Wilbur Ross said as much yesterday and Trump warned China that any retaliation against our farmers or industries would immediately result in tariffs on all remaining imports from China.

As reported in the above-linked Reuters article:

… Foreign Ministry spokesman Geng Shuang told a news briefing later that the U.S. steps have brought “new uncertainty” to talks between the two countries.

“China has always emphasized that the only correct way to resolve the China-U.S. trade issue is via talks and consultations held on an equal, sincere and mutually respectful basis. But at this time, everything the United States does not give the impression of sincerity or goodwill,” he added.

I can’t let that pass.  Let’s get one thing straight.  Red China is not America’s equal in any respect.  (I refer to them as Red China because their annointing of Chairman Xi as chairman for life proves that they are still nothing more than the totalitarian, communist regime that they were under Mao Tse Tung.)  Such regimes aren’t worthy of American respect.  Red China’s economy – formerly an economic backwater – has been propped up by dumb American trade policy.  It’s time to kick away that prop.

Business groups warned of disruptions to their supply chains.  Funny.  They had no problems with disrupting their long-standing American supply chains when they moved them to China in the first place.

Others warned of economic harm to American consumers:

“President Trump’s decision … is reckless and will create lasting harm to communities across the country,” said Dean Garfield, president of the Information Technology Industry Council, which represents major tech firms.

Seriously?  Recently, Trump was criticized for denying the death toll in Puerto Rico in the wake of hurricane Maria last year.  That death toll figure was arrived at by comparing the death rate in Puerto Rico to the death rate preceding the hurricane.  OK, let’s apply that same logic to American trade policy.  In the wake of engaging in free trade with China, Americans’ life expectancy has actually declined and death rates have risen as despair set into communities where one factory after another closed.  So, applying that same death toll methodology to U.S. trade policy, it’s clear that previous administrations are responsible for not a few thousand deaths, but millions.  And as the economy continues to recover in response to Trump’s trade policies, he can be credited with saving millions of lives.  Anyone with a brain can see that it was the export of American jobs to China that did “lasting harm to communities across the country.”  Reversing that process, as Trump is doing, can only be a huge boon to American communities.

One group has been conspicuously silent during this whole process and no one has reported on it.  For decades, American trade policy has been paralyzed by fear of the World Trade Organization.  Now we can see what an irrelevant, toothless tiger that organization is.  In Five Short Blasts, I pointed out that the WTO was actually powerless to do anything that nations weren’t already free to do before the organization existed.  Why have we waited all this time to take our trade policy back in our own hands and impose tariffs to restore a balance of trade?  Why have we stood idly by and racked up trillions of dollars of debt and devastated our communities out of fear of this organization?  Stupid.  There’s just no other word to describe it.

I honestly thought I’d never live to see the day when America would stand up for itself again.  It seemed that the sappy globalist mentality, reminiscent of the ’70s Coca Cola ad where everyone held hands and sang “I’d like to teach the world to sing in perfect harmony,” had condemned America to live out the rest of its existence as a sick host, lying helplessly as it’s fed upon by a horde of trade parasites.  But that day that I thought I’d never see came on Monday.  America has stopped being a trade chump.  There’s much more to be done.  The European Union has been as much of a trade parasite as China and needs to be dealt with in the same way.  So too does Mexico.  But this is a good start.

 


Trade Deficit in Manufactured Goods Hits Another Record in July

September 6, 2018

Yesterday the Commerce Department announced that the overall trade deficit rose to $50.1 billion in July – bad, but still in the $37-55 billion range where it has hovered for years.  Only by doing a deep dive in the data – removing services, food and oil – can you arrive at the really bad news in the report – that the trade deficit in manufactured goods shot to yet another all-time high in July of $69.3 billion, beating the previous record of $68.4 billion set in February earlier this year.  Here’s the chart:  Manf’d Goods Balance of Trade.

Over the past few months, we’ve heard a lot about the Trump administration’s “trade war” with the rest of the world in an effort to restore a balance of trade.  But so far, there’s no evidence of any positive results to be found in the trade data.  What’s going on here?

Several things.  First of all, it’s important to note that, for all the talk we’ve heard about this issue, so far it’s been mostly talk.  There’s been talk of slapping tariffs on another $200 billion of imports from China.  More recently, that’s escalated to include all $500-some  billion of their imports.  There’s been talk of imposing tariffs on all auto imports from the European Union.  There’s been a lot of talk about tough negotiations to revise the North American Free Trade Agreement with Mexico and Canada.  But the reality is that, so far, the Trump administration has imposed small tariffs on aluminum and steel imports and on about $50 billion of Chinese imports.  That’s a small drop in the bucket compared to the $3 trillion of imports from around the world.  In essence, the trade war really hasn’t started yet.  The U.S. and the rest of the world have simply been exchanging steely stares across the battlefield.  The only shots fired have come from BB-guns.

If anything, other Trump economic policies may actually have exacerbated the deficit.  The tax cut that went into effect this year has boosted the economy by as much as 4% (according to the most recent GDP data), but the trade deficit in manufactured goods has worsened by 18% since the tax cut went into effect.  It’s clear that much of the tax cut has been spent by Americans on more imports.  It’s actually boosted the global economy much more than the U.S. economy.

However, all that may soon change.  The tariffs on an additional $200 billion of Chinese imports has been on hold during a public comment period.  That period actually ends today.  So the tariffs may very soon be implemented.  The Chinese will begin feeling the pain and, admittedly, so too will American consumers.  They’ll feel that pain until manufacturing begins to return to the U.S. and drive up wages.

The talk of tariffs has so far had little effect on corporate supply-chain strategies.  Corporate leaders still think it’s all a bunch of bluster by Trump, and that all will return to normal if he manages to win some token concessions from other countries.  They’re not going to revise their sourcing strategies and investments in foreign countries until they really start to feel pain from the tariffs.  But there is evidence that it’s beginning to happen.  Earlier this week, Ford announced that it was cancelling plans to begin importing a car model from China, explaining that the expected tariffs on those cars would wipe out what was already a thin profit margin.  GM already imports the Buick Envision model from China.  If Ford sees importing cars from China as a losing proposition, surely GM is considering similar action.

Then there’s the new trade deal between the U.S. and Mexico which promises to shift some car and parts production back to the U.S.  It’s not a signed deal yet, but it’s coming.

So the message here is to be patient.  But at the same time, the Trump administration needs to feel some sense of urgency to start producing results.  The tax cut will only carry the economy so far and for so long.  Real economic reform is totally dependent on a re-balancing of trade that hasn’t actually begun yet.


Population Density Disparities Drive Global Trade Imbalances

July 14, 2018

In recent posts, we looked at lists of America’s best and worst trading partners in terms of the balance of trade in manufactured goods, and found strong evidence of a link to population density.  The lists of our biggest trade deficits, in both absolute and per capita terms, was dominated by densely populated nations like Germany, Japan and China.  The lists of our biggest trade surpluses was dominated by low population density nations, and by net oil exporters (caused by the fact that oil is traded in American dollars).

Now let’s include all nations*, dividing them equally around the global median population density (which is 194 people per square mile).  Look at this chart:  Balance of Trade Above & Below Median Pop Density.  With those half of nations below the median population density, the U.S. enjoyed a small surplus of trade in manufactured goods of $36 billion in 2017.  However, with those half of nations above the median population density, the U.S. suffered an enormous deficit of $761 billion.  Also, note how the disparity has dramatically worsened over the 14-year time period from 2005 to 2018.  The longer the U.S. attempts to engage in free trade indiscriminately, ignoring the role of population density, the worse the effects become.

One may argue that perhaps dividing the nations of the world around the median population density skews the results, since the more densely populated half of nations includes far more people than the less densely populated half.  Fine.  Let’s divide the world in a way that compares the half of people who live in more densely populated conditions vs. the half of people who live in less densely populated conditions.  If we do that, in 2017 the U.S. had a trade deficit in manufactured goods of $510 billion with the half of people living in more densely populated conditions, and a deficit of only $214 billion – less than half – with the half of people living in less densely populated conditions.  Still a strong correlation to population density.

But maybe that’s not the right way to look at it either.  Perhaps we should divide the world in half according to land mass – that is, the half of the world’s surface area that is less densely populated vs. the half that is more densely populated.  (No, Antarctica is not included in this analysis.)  If we do that, the results are even more dramatic.  With the half of the world’s surface that is more densely populated (accounting for 6.6 billion of the world’s 7.1 billion people), we had a trade deficit in manufactured goods in 2017 of $831 billion.  With the less densely populated half of the world, we had a trade surplus of $107 billion.  (It’s worth noting here that the split occurs at a population density of 56 people/square mile.  That is, the less densely populated half of the world has a population density of 56 or less.  The more densely populated half is greater than 56.  The population density of the U.S. is about 90.)

Think about that.  This means that the U.S. economy would fare much better if the population of the more densely populated half of the world were no greater than the less densely populated half – which would yield a world population of about 1 billion people instead of 7.1 billion.  Instead of a net trade deficit in manufactured goods of $724 billion, we’d have a trade surplus of $214 billion (double the trade surplus that we currently have with the less densely populated half of the world).  One can debate what would be an optimum population density in economic terms, but there’s no question that this is a powerful argument for factoring population density into our trade policy.  Beyond that, it also debunks in a strong way the contention of economists that an ever-growing population is essential to sustaining a healthy economy.  It does nothing of the sort.  Instead, the crowded conditions that characterize a dense population stifle consumption – and thus employment – making people dependent on manufacturing for export to escape poverty.

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* Not all nations are included in the study.  Tiny island nations have been omitted since they don’t factor into the trade equation and, while such nations tend to be densely populated, they also enjoy unique economies, based primarily on tourism.


America’s Biggest Trade Surpluses in 2017

May 4, 2018

In my last post, we looked at a list of America’s twenty worst trade deficits in manufactured goods in 2017 and saw that the list was dominated by nations much more densely populated than the U.S.  We also saw that, contrary to conventional wisdom, low wages don’t seem to be a factor in driving these deficits.

Now let’s examine the other end of the spectrum – America’s twenty biggest trade surpluses in manufactured goods in 2017.  Here’s the list:  Top 20 Surpluses, 2017

There are actually a couple of factors that jump out on this list.  Most importantly, notice that this list is peppered with nations with low population densities.  The average population density of the twenty nations on this list is 209 people per square mile, compared to 734 people per square mile on the list of our twenty worst deficits.  However, the difference is actually much more dramatic when you account for the fact that four of the nations on the list of surpluses are very tiny nations with small (but dense) populations – the Netherlands, Belgium, Kuwait and Qatar.  If we calculate the population density of the twenty nations on this list as a composite – the total population divided by the total land area – we arrive at a population density of only 34 people per square mile.  Doing the same with the twenty nations on the deficit list yields a population density of 509 people per square mile.  Thus, the nations with whom we have our largest trade deficits are fifteen times more densely populated than the nations with whom we have our largest trade surpluses.

Why do the aforementioned nations – the Netherlands, Belgium, Kuwait and Qatar – seem to buck the trend?  The first two nations are tiny European nations who take advantage of their deep sea port – the only one on the Atlantic coast of the European Union – to build their economies around trade, importing goods from the U.S. for distribution throughout Europe.  These surpluses offset somewhat the much larger trade deficit that the U.S. has with other European nations.  Even with the Netherlands and Belgium included, the trade deficit with the European Union is still enormous – second only to China.

The presence of Kuwait and Qatar on the list of trade surpluses, in spite of their dense populations, illustrates the other factor that drives trade surpluses.  Both of these nations, along with the other nations highlighted in yellow on the list, are net oil exporters.  Since all oil is priced in U.S. dollars, it leaves these nations flush with U.S. dollars that can only be used to buy things from the U.S.  It makes a trade surplus with an oil exporter almost automatic.

Now, look at the “purchasing power parity” (or “PPP,” roughly analogous to wages) for the nations on this list.  The average is just under $40,000, compared to an average PPP on the deficit list of $35,000.  However, that average is skewed significantly by tiny Qatar, who has a PPP of $124,900.  Take Qatar out of the equation and the average drops to $35,500 – almost exactly the same as the nations on the list of our biggest deficits.

So, of these two factors – population density and wages – which do you now think is the real driver of trade imbalances?  Is it the one that differs by a factor of fifteen between the two lists, or the factor that is virtually the same on both lists?  Clearly, population density seems to be a much more likely factor in driving trade imbalaces, at least from what we’ve seen from these two lists.

But both lists contain nations that are very large and very small.  It seems only natural that, if we’re going to have a trade imbalance with any particular nation, it will be a much bigger imbalance if that nation is very large.  We need to factor the sheer size of nations out of the equation.  That’s what we’ll do next in upcoming posts.  Stay tuned.

 


America’s Worst Trade Deficits in 2017

May 2, 2018

I’ve finished compiling and analyzing America’s trade data for 2017, which was released by the Bureau of Economic Analysis in late February.  Why the delay?  Tabulating the results for hundreds of 5-digit end use code products for 165 nations is no small feat.  What we’re looking at here are the deficits in manufactured goods as opposed to services and various categories of natural resources.  Why?  Because manufacturing is where the jobs are.  Yes, there are jobs associated with the harvesting and mining of natural resources but, pound for pound, those jobs pale in comparison to the number generated by manufacturing.

And it should be noted that there are more than 165 nations in the world.  The CIA World Factbook lists 229.  Nearly all of the 64 nations that I left out of this study are tiny island nations with whom combined trade represents only a tiny fraction of America’s total.  Also, their economies tend to be unique in that they rely heavily on tourism and their manufacturing sectors are virtually non-existent, if for no other reason than a lack of space to accommodate manufacturing facilities.

It should also be noted that I’ve “rolled” the results for tiny city-states into their larger surrounding nations – states like Hong Kong, Singapore, San Marino, Luxembourg, Liechtenstein, Monaco and others.  They too tend to have unique economies, heavily dependent on services like financial services, and mostly devoid of manufacturing for the same reason as small island nations – a lack of space.  There is no room for sprawling manufacturing complexes.

So, with that said, let’s begin with a look at America’s biggest trade deficits.  Here are the top twenty:  Top 20 Deficits, 2017

It comes as no surprise that China once again has topped the list with a whopping $384.7 billion deficit.  But there are many interesting observations that can be made about this list:

  1. There’s a lot of variety on this list – nations big and small, rich and poor, Asian, European and Middle Eastern nations.  But there’s one thing that all except one have in common – a high population density.  The average population density of this list is 734 people per square mile.  Compare that to the population density of the U.S. at 91 people per square mile.  On average, the nations on this list are eight times more densely populated than the U.S.
  2. With a few exceptions, these are not poor countries where wages are low.  Half of the top ten nations have a “purchasing power parity” (or “PPP,” a measure of wealth that is roughly analogous to wages) near or, in one case (Ireland), above that of the U.S. ($59,500).  Only one nation in the top ten – Vietnam – has a PPP of less than $10,000.  So, the claim that low wages cause trade deficits isn’t supported by this list.
  3. Two nations on this list – China and India – represent 40% of the world’s population.  On the other hand, there are others that, combined, make up less than 1% of the world’s total.  Naturally, if we have a trade deficit with a big nation, it tends to be really big.  In order to identify the factors that influence trade, we need to factor sheer size out of the equation.
  4. On average, the U.S. trade deficit in manufactured goods has risen by 81% with this group of nations over the past ten years.  Whatever it is that drives trade deficits has a very potent effect.  The fastest growing deficit is with Vietnam, rising by 335% in ten years.  Vietnam is the 2nd poorest nation on the list.  Perhaps low wages do play a role here?  On the other hand, the 2nd fastest growing deficit is with Switzerland, the 2nd wealthiest nation on the list – wealthier than the U.S. – debunking the low wage theory.
  5. It’s often said that America needs to be more productive in order to compete in the global economy.  Yet we see nations like France and Italy on this list – nations notorious for long vacations, short work weeks, etc. – not exactly bastions of productivity.
  6. In 2017, the U.S. had a total trade deficit of $724 billion in manufactured goods.  Of these 165 nations in this study, the top eight deficits on this list account for more than that entire total.  The U.S. actually has a small surplus of trade with the other 157 nations of the world.

In my next post, we’ll take a look at the other end of the spectrum – America’s top twenty trade surpluses in manufactured goods.  If population density is a factor, then we should see that list comprised of nations with low population densities.  And if low wages aren’t a factor, we shouldn’t see anything much different than what we saw on this list presented here.  So stay tuned.