KEY DATA: Deficit: $48.3 billion ($6.5 bil. wider)/ Home Prices (Year-over-Year): 6.9%

IN A NUTSHELL: “The stronger dollar is beginning to bite into exports and the trade deficit is soaring as a result.”

WHAT IT MEANS: When you have the one solid economy in the world and your currency is rising, you start to price your goods out of the market that is precisely what is happening.   U.S. exports fell sharply in August, declining by over 3%. The only category that posted a gain was capital goods, as aircraft shipments surged. Otherwise, we saw declines in sales of food, consumer goods, vehicles and industrial supplies. Oil was down, but that was more a price issue than a demand slowdown. Meanwhile, we bought a lot of goods from the rest of the world. Indeed, demand for almost everything except vehicles and petroleum rose. Looking across the world, it is hard to find a country that bought more of our products. But, lots of countries ramped up their sales to us. Not surprisingly, Chinese exports to the U.S. rose sharply while their purchases of U.S. products continued to decline. This is not a new trend: It has been going on for about a year now. Actually, that is a pattern that has emerged with other major trading partners such as Mexico and Canada.

While the world may be having issues, the U.S. economy, especially the housing market, is not. CoreLogic reported that home prices surged 1.2% in August and were up by nearly 7% over the year. A growing number of metropolitan areas are now considered to be “overvalued”. The strong price increases are lifting a lot of boats from underwater to good condition. That should create increasing numbers of homes on the market and since inventory has been a restraining factor, sales should rise. But as more resales hit the market, housing starts increase and ultimately mortgages rise, the price increases should moderate.

MARKETS AND FED POLICY IMPLICATIONS: The U.S. is the market of last resort and foreign companies are shipping everything they can over here. At the same time, the dollar is creating pain for our exporters. Though trade should restrain third quarter growth, domestic economic conditions are still quite good. When you adjust for prices, exports may be slipping, but they are hardly crashing and burning. Firms are fighting hard to keep their share of the foreign markets. Also, housing remains quite strong. While others bemoan price increases, I keep arguing that people can sell their homes only if they have enough equity to allow them to sell. Nothing helps housing supply more than rising prices, so I am happy to see the increases and see that they are spreading across the nation. As for the markets, isn’t it great that the investors think bad news is good news? Who cares what that really means: All that matters is the Fed may put off raising rates and the liquidity will keep on rolling into the financial markets. Yes, I am being sarcastic. Do these data have any implication for Fed policy? Probably not. Former Fed Chair Ben Bernanke comments this week were taken to imply the Fed is on hold for a long time, or at least until the 2% inflation target is clearly in sight. Mr. Bernanke was a great crisis manager, but clueless about the economy when it was not in trouble. Remember, he claimed the housing bubble was slowly deflating. Enough said.