KEY DATA: Deficit: $50.1 bil. ($4.3 bil. wider); Exports: -1%; Imports: +0.9%/ HWOL: -46,300

IN A NUTSHELL: “The widening trade deficit will restrain growth in the third quarter.”

WHAT IT MEANS: We shall see if all the machinations going on over tariffs and trade deals ultimately lead to a narrowing of the trade deficit, but for now, the shortfall seems to be rebounding after an initial decline. The July trade deficit surged, which was expected, though the widening was larger than expected. A decline in imports was not a surprise as the rush to export soybeans led to a temporary jump in agricultural shipments. That unwound in July. However, exports of aircraft and consumer goods also declined. Overseas sales of vehicles and industrial products were up. On the import side, demand for just about everything except pharmaceutical products increased. Energy was not a major factor in the results.

Online want ads faded a touch in August. The Conference Board’s measure was down and a chart of the last year looks like a very scary roller coaster. But it starts and ends at roughly the same point, so it looks like the level is stuck in a range. Unfortunately, that range is well below the highs put in at the end of 2015. What does that mean for job growth? Probably little as it is doubtful that firms have cut back because they are looking for fewer workers. More likely, there is recognition that they can fill only so many open positions at a time, so the decline in ads probably reflects the supply of workers not the demand for workers.  

MARKETS AND FED POLICY IMPLICATIONS: The large widening of the trade deficit in July is likely to be sustained and trade will probably restrain growth this quarter. This is important because the narrowing in the trade deficit added 1.2 percentage points to growth in the second quarter. My best guess as of now is that trade may reduce third quarter growth by between one-quarter and one-half a percentage point. That is a swing of roughly 1.5 percentage points, meaning if everything else stays the same, GDP growth would be in the 2.5% to 2.75% range. But everything is not equal. Vehicle sales were soft again in August. Vehicles boosted growth in the second quarter. A decline in the third quarter would restrain overall growth by about 0.25 percentage point compared to the second quarter. To get to three percent, we need stronger government spending and much faster business investment. That is why I have been warning that third quarter growth could come in lower than many expect. While investors should take heed, Friday we get the August jobs report. I suspect that will be the focus of attention, at least when it comes to hard economic data. The consensus is for a rebound from the more moderate July number but still below the roughly 215,000 monthly average seen so far this year. But it is the wage number that is really important, as wage gains remain limited. It could run hot, which would be just another reason for the Fed to hike rates.