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The trade deficit could have narrowed in December

Mon, Feb 11 2008, 09:46 GMT
by BHF-Bank Economics Department

BHF-Bank

• Retail sales are likely to have fallen again in January, partly because of low auto sales

• The New York Empire index will probably fall into negative territory in February

• Industrial production could have stagnated in January

• UMI’s consumer sentiment is likely to have fallen back in February

The Congressional Budget Office (CBO) estimates that the January budget surplus will have shrunk to $15bn – $23bn less than in the previous year. Thus the cumulated deficit after the first four months of the new fiscal year would be $90bn, more than twice the deficit registered in the same period of the previous fiscal year. Due to the growth slowdown and the fiscal measures planned to support the economy, the deficit could jump to more than 3% of GDP this year, after only –1.2% in the fiscal year 2006/2007.

We expect another weak retail sales report in January for several reasons: first of all, the ISM non-manufacturing index reported contraction in the retail sector, and weekly retail activity reports point to flat or falling sales. Secondly, domestic car sales corrected downwards by more than 6% mom. Gasoline prices were little changed and thus will not have had a noticeably positive impact this time. Given the deterioration in the labour market and consumer confidence surveys, we expect retail sales to have fallen again by 0.4% mom (less autos: –0.1% mom).

We expect business inventories to have risen by 0.6% mom in December. We already know that factory inventories increased by 0.8% mom, and wholesale inventories even went up by 1.1% mom. The Department of Commerce also assumed an increase in December retail inventories in its advance GDP estimate. Due to the relatively sharp rise in factory and wholesale inventories, it is possible that the GDP figures for Q4 will be revised upwards, but as sales growth was slower, the inventory buildup was only partially voluntary, which will dampen growth in the near future.

We expect the trade deficit to have narrowed from $63.1bn to $60.5bn in December: after rising by 3% mom, imports are likely to have developed weakly, given that import prices were unchanged and domestic demand has been slowing down. In addition, the port of Los Angeles reported a decline in loaded containers; this would be in line with the Department of Commerce’s assumption that imports could have decreased somewhat. In contrast, due to robust global demand, exports could have risen more strongly than in November, when they only went up by 0.5% mom.

Import prices could have risen by at least 0.8% mom in January, as crude oil prices were quite high in the first half of the month. This would raise the annual rate to about 13% – a new all-time high.

As expected, initial jobless claims corrected downwards by 22k to a still elevated level of 356k in the last week of January. We expect labour market conditions to continue weakening, and thus forecast that jobless claims will have remained almost unchanged at 355k in the week ending 9 February.

Contrary to the Philadelphia Fed index which plummeted to –20.9 in January, the New York Empire manufacturing index remained quite stable at 9.0. However, we expect it to fall into negative territory as well in February, to –2.0. This would be the first negative reading since May 2005.

We forecast that industrial production will have only remained unchanged in January. The ISM manufacturing index is fluctuating around the expansion threshold of 50, and relatively mild temperatures could have dampened utility output. The capacity utilization rate might have gone down slightly to 81.3%.

We expect net foreign security purchases of US long-term securities to have fallen from $90.9bn to about $65.0bn in December. The “flight to safety” is likely to have continued, and thus Treasuries could have been the favourite asset class, but net demand for corporate bonds and stocks has probably remained modest. It will be interesting to see whether US residents will again have been net sellers of foreign longterm assets, which boosted last month’s net foreign purchases of US assets by $11.2bn.

The University of Michigan’s consumer sentiment went up unexpectedly in January, but the improvement was curtailed from 5 points to 2.9 points in the final results. This indicates that late respondents were more pessimistic, and thus the preliminary February index is likely to show a decrease. In addition, the weekly ABC consumer comfort poll fell sharply by six points to –33, which was the lowest level since autumn 1993. We forecast that UMI’s consumer sentiment will decline to 74.0 in February.

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Published on  Mon, Feb 11 2008, 09:53 GMT