KEY DATA: Deficit: $59.8 bil. ($9.5 bil. wider); Imports: +2.1%; Exports: -1.9%/ ADP: +183,000/ HWOL: +0.3 points
IN A NUTSHELL: “The soaring trade deficit is troublesome, especially if job gains begin to fade.”
WHAT IT MEANS: The markets are fixated on the trade discussions with China and for good reason: The trade deficit is soaring. In December, it reached its widest level since October 2008, when the financial system was collapsing. Of course, conditions are a lot different now, since we are growing decently while we were in a recession then. But the hoped for narrowing has not happened. Since the fourth quarter of 2016, the quarterly trade deficit has widened by nearly 18%. In December, imports rebounded from a sharp decline in November while exports continued to decline. As for the situation with China, the numbers for the year were ugly. The deficit widened by nearly 12%. Yes, exports were up, by nearly 6%, but imports rose faster. Keep in mind, our imports from China in 2018 totaled nearly $540 billion but our exports were a paltry $120 billion. But our trade deficit didn’t just widen with China. It was larger against the EU, Canada, Mexico, Germany and OPEC nations. In other words, we are funding a large part of the growth, whatever pace it may be, of an awful lot of nations.
Friday is Employment Friday, so today is ADP Wednesday. Okay, those are my nicknames, but when the job report is due out, we get an indication of what the level might be when ADP releases its reading on private sector payroll gains. Not surprisingly, the increase in February payrolls is likely to come in well below the initial January government reading of 304,000. Two things stand out in the ADP report: Construction and manufacturing continue to boom but small businesses are having a tough time getting and/or holding workers. Larger firms, which can pay the higher costs, are leading the way.
Confirming that the labor market remains strong was the rise in the Conference Board’s Help Wanted OnLine index in February. However, the details contain some warning signs. Five of the nine regions posted declines in both January and February. This may indicate that the surge in payroll gains is coming to an end and more sustainable numbers, in the 150,000 to 175,000 range, could be what we see for much of the remainder of the year. MARKETS AND FED POLICY IMPLICATIONS:The widening trade deficit, when combined with a softening of consumer spending (February vehicle sales were quite soft), points to a pretty ragged first quarter GDP growth number. I haven’t seen any negative numbers yet, but estimates of around 1% growth are popping up all over the place. I have dropped my estimate to 2%, but the vehicle numbers are compelling enough to take that forecast down further. As I have noted, even if there is a trade agreement of some sort, it will not cause a sudden burst in U.S. exports to China. That will take time and if the Chinese growth is as soft as most economists believe (forget the official numbers), it is hard to see how they can ramp up demand for U.S. products very much this year. At least we have the massive government spending bills to fall back on, but those effects will fade as we go through the year. So, expect growth this year to be a lot less than many had thought, though in the range of what most economists expected.