Guest Post: Trade Deficit - Recession Risks Increase

Tyler Durden's picture

Submitted by Lance Roberts of StreetTalkLive,

I recently penned an article entitled "3 Major Risks To The 4th Quarter" wherein we discussed the impact of the Eurozone recession, and slowdown in China, on the domestic economy.  In it we stated "The continued recessionary drag across the Eurozone is dampening revenues and slowing demand for exports from the U.S.  Recent corporate reports from key transportation related companies have all warned of weaker outlooks due to slowdowns in the Eurozone."

The chart below was presented recently by the Frederick Smith, the President and CEO of FedEx Corp., which shows the clearly negative trends in the year-over-year exports including the U.S.  



These very negative trends are important to understand because it is the source of revenue for businesses worldwide.  As consumer demand slows it reduces the need for production ultimately reducing profitability.  Furthermore, this delcline in production and consumption leads to higher unemployment, lower incomes and ultimately an economic recession.  Domestically, exports are more crucially important than ever as they now comprise more than 13% of GDP and 40% of corporate profits.



Historically, when exports have turned down the economy was either in, or slipping into, a recession.  The recent drop in durable goods orders and industrial production have been clear warnings that this could already be in the works.  

Today's release of the trade data provides further recessionary warning signs.  In August, the U.S. trade balance worsened as exports declined reflecting economic weakness in Europe and slower growth in Asia.  Also, oil and petroleum product imports jumped on higher prices due to a weaker US Dollar.

The trade deficit expanded to $44.2 billion from $42.5 billion in July (originally $42.0 billion).  Exports fell 1.0 percent, following a 1.1 percent decrease in July. Imports slipped 0.1 percent after a 0.6 percent dip the prior month.  The decline in exports was again was led by a decline in industrial supplies, foods, feeds & beverages with minor slippage in autos and consumer goods.  None of this data is good for corporate earnings heading into the 4th quarter particularly as higher oil prices impact consumer demand.

Furthermore, this data is clear evidence as to why businesses are remaining cautious about equipment investment as demand for consumer goods, and capital goods excluding autos, continue to weaken.  The decline in consumer goods leads to concerns about future demand putting businesses on the defensive which was clearly evidenced in our recent report on the NFIB Survey: "The ongoing problem remains 'poor sales' which is the driver for all other business actions from increased capital expenditures to future employment.

From the report: 'Weak sales continue to be an albatross for the small-business community. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was unchanged at a negative 13 percent, cementing the 17 point decline since April and affirming weak GDP growth for the second quarter. Twenty-one (21) percent still cite weak sales as their top business problem—historically high, but down from the record 34 percent reached in March 2010.

Consumer spending remains weak and high energy costs continue to 'tax' consumer disposable income. The net percent of owners expecting higher real sales was unchanged at one percent of all owners (seasonally adjusted), down 11 points from the year high of net 12 percent in February. The weak reading is unlikely to trigger orders for new inventory or business expansion. Not seasonally adjusted, 24 percent expect improvement over the next three months (down 4 points) and 31 percent expect declines (up 3 points).'

The chart below shows capital expenditure plans versus future expectations about the economy. The importance here is that companies are primarily spending on maintenance of plants, property and equipment rather than expansion and upgrades. In the most recent report only 34% reported spending on new equipment which was down 7 points from August. Only 16% acquired vehicles - a decline of 5 points, and just 14% improved or expanded facilities which remained unchanged from the previous report. Overall, there was a substantial reduction in capital spending activity with the percent of owners planning capital outlays in the next three to six months falling 3 points to 21%.



The outlook, and ultimately actions taken, by businesses are driven by demand for their products, goods and services.  Unfortunately the Fed's bond buying program does not impact these core issues.

However, what QE programs do have an impact on is the value of the dollar relative to other currencies.  Historically, the dollar has declined during stimulus programs as money is pulled out of safehaven investments and moved into risk assets such as commodity and stock markets. During the third quarter as the markets advanced in expectation of the Fed's announcement of QE3 - the dollar declined sharply.  Therefore, as shown in the chart below, the recent increase in the trade deficit occured as stated in our last report.  "The continuation of the Eurocrisis has created a capital flight into the US dollar for 'safety.' However, since July, the strong dollar trend has reversed on the announcement by the ECB 'do whatever is necessary' to save the Eurozone. Therefore, the trade deficit will increase in the next couple of months as the dollar weakens making imports more expensive for already cash strapped consumers."



Trade Deficit Points To A Recession?

The overall backdrop from the trade report does not bode well for a reversal of fortune for corporations domestically.  The increase in the deficit will subtract from GDP in the coming quarter, as shown in the chart above, as Net Exports are a part of the GDP calculation.  The issues is that with the economy currently growing at an already very weak 1.25% in Q2 - there simply isn't much wiggle room between growth and contraction.

The risk to the current expectations of continued growth in 2013 is that the annualized rate of growth in both imports and exports is not supportive of those expectations.  With exports now making up such a large percentage of GDP, and imports reflecting a weak consumer, the implications are for further weakness in GDP. The chart below shows the year-over-year change in imports and exports. Historically speaking, when both imports and exports have declined in unison it has indicated the onset of a recession. With the current decline in both imports and exports close to going negative the outlook is worrisome.



The recent trade report does not provide much support for the economic and stock market bulls. As we have stated many times - the current fundamental and economic backdrops are not supportive of higher asset prices at current levels.  However, while the market may advance due to the injections of liquidity into the financial system - it doesn't make it a "healthy" market.

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Thecomingcollapse's picture

Question for ZH'ers

I thought last night about ways to get rid of politicians and lobbyists that are ruining the nation.

What if we had a national "selective service" number assigned to every citizen, then every year or two you pulled a random selection of people from Rep., Dem. Indp... whatever and assigned then to Congress and the Senate.  Gave them a one month class on how the government works and let them serve their terms guaranteeing their jobs that they left upon end of service in the government.  I think it would get rid of all lobbying and all career politicians.

What do you think? 

Feedback please

Sock Puppet's picture

Are you some kind of "Constitutionalist" too? Bunch of Red Necks around here.


fuu's picture

Are you some kind of Repugnicant?

Sock Puppet's picture

The constitution is out dated, get with the times.

Sock Puppet's picture

Americans are the fattest most apethetic people in the history of mankind.  Our cumulative weight is "over weight" by like 2 billion pounds.  You ZHs can eat them when the SHTF, they will move real slow like fattened cows in a field.

CPL's picture

The constitution is written in pencil.

Sock Puppet's picture

Might as well add the name "Charmin Toilet Paper" to it.  It doesn't support the police state we need for our own good.

Anusocracy's picture

The concept of government is outdated.

It's so 10,000 years ago.

LiesAreTheOnlyTruth's picture

Ha...good theory ... but won't work.

Once you are IN OFFICE ... life is far different than when you are not in office.

Suddenly, it "makes sense" to charge $120 for a parking ticket or impound a car for too many.  You now see people who don't pay parking tickets as deadbeats and "what the hell, they broke the law, they must pay" becomes your mantra.

Suddenly, replacing an entire computer system you just purchased last year is logical.  A study can be paid for to show your logic is sound and the benefits of the new system can be proven in conference or committee.  It will make it easier for us and better for the ones we represent ... it's just a new form of INSIDE logic you develop.

Once you're on the INSIDE, you think differently.  THAT is the thing to remove ... the INSIDE feeling you get when you have access and power.

Having been on the INSIDE, I'll tell you, even if half of the people INSIDE don't think like that, you just need one to tip the scales.  Eventually, the majority of them convert to the INSIDE mentality.

Hard to explain or convey but you CHANGE when you're on the INSIDE ... ALL the complaints and things you said you would fix, suddenly, become OK ... now that you "understand" them.  Since all your fellow legislators have this mentality, it's OK.  It's a CULTURE that is in need of repair, the INSIDE CULTURE that people adopt and adore once they are in office.

Thecomingcollapse's picture

Thanks, Yeah... Just working this theory out in my head.  You are right about that "inside" feeling and the feelings of power, it would be a hard thing to not have people want to take advantage of.  Just pretty damn sick of the career politicians and the current system.  I think if a person wants to be there it's because they have an agenda.  IF a person was to be there out of duty and not because they wanted to... possibly things might change.

FL_Conservative's picture

Best thing to do is push all but the 18 enumerated functions back to the state (and local) governments.   That would get rid of the majority of the problem.

CPL's picture

Shhh, that would mean culpability and ownership of the problem.


Sock Puppet's picture

Another Constitutionalist, you think the states can do better.  The US needs to stay United with a strong federal government in order to protect us from terrorists.  It is for our own good, even for those like "you" that just don't get it.

Overfed's picture

It seems like you're forgetting the sarc tag. Or, you're a statist shill.

Anusocracy's picture

"Just pretty damn sick of the career politicians and the current system.'

Government is the current system, and like shit, it doesn't matter what flavor it is.

LooseLee's picture

Uh, correction. Its a culture that needs to be removed (violently if necessary) from the consciousness of humanity....

Anusocracy's picture

I support the separation of State and Existence.

DCFusor's picture

I wish such a thing would work - if you could get it passed (zero chance of that).  But it woudn't get rid of lobbyists at all - who already write 90%+ of the words in our laws, because our lawmakers can't be bothered to have their own ideas, and who are fooled into thinking the economic health of the big companies is the only important thing, since that's all they hear from.  We little guys can't afford to lobby, so we just aren't on their radar at all other than for sound bites around election time.

XRAYD's picture

Think about who has to pass such a law!

Black Markets's picture

Equities are rising because cash is crashing.

Zerohedge seems to believe (rather conflictingly) that all asset classes should crash whilst the monetary base suffers very high or hyper inflation.

Trying to call heads and tails on the same coin toss?

It just looks dumb. If you expect hyper inflation then you also expect the DOW to soar past 20,000 past 30,0000 past 50,000 and beyond.

Yet here on this website people believe that hyperinflation is a near certainty but they also express amazement and wonder whenever the stock Market rises. Thes two views are conflicting and nobody here seems to recognise their own hypocrisy.

So which is it? Is the monetary base going to collapse or are asset prices going to collapse?

You can't have both. Well actually you can, but in that scenario all prices would remain stable, and everything would continue as normal.

The truth is that this blog is populated by nihilists who are bitter at their perceived injustice in life and lack of recognition, and cling to this fantasy that says it can flip society on it's head and deliver them the kudos they deserve.

Don't hold your breath! Because the general view here is totally confused and conflicting. Meanwhile everyone else (80% of folk) continues to work.

illyia's picture

What does "lack of confidence" do? If the FedRes is loaded with non-performing MBS and other crap and the USAGov is in debt up to it's eyeballs and... there are lesser and lesser earnings due to J6P not buy-buy-buying... and dollars are being force-fed into a banking system intent on covering it's bad risks...

What does that add up to for you?

[Hint(s): 1. It is not pretty. 2. When the SHTF it does not distribute evenly.]

Sock Puppet's picture

B.S.  Take a look at CNBC Jobs.

"The Labor Department said weekly applications fell by 30,000 to the lowest level since February 2008. The four-week average, a less volatile measure, dropped by 11,500 to 364,000, a six-month low.

Applications are a proxy for layoffs. When they consistently drop below 375,000, it suggests that hiring is strong enough to lower the unemployment rate."

northerngirl's picture

You are correct!  This truly is a wonderful job market for those seeking a part time minimum wage job.

LiesAreTheOnlyTruth's picture

NOTHING matters ... the more they print, the more committed they are to the lie the more lies they create.

It's an endless loop, it's just hard to time the day when it all crashes down.  Until then, the Fed will buy the entire world stock market if necessary ... they'll print 200 Trillion if they have to, it's just buttons they press.

What's the harm?  How can it hurt to inflate prices all over the world?  How can it hurt to inflate assets so taxes go up?  How can it hurt pensions and funds to get inflated to infinity? 

Oh ... purchasing power ... that will be fine.

illyia's picture

Like your name...

Sometimes I think it is predators and prey and there are just too many predators...

And the remaining prey are catching on...

disabledvet's picture

Those are spectacular increases in trade from "the collapse." So the question then becomes "from whence the demand for imports?" If the economy was really shitting the bed here we'd see an enormous downturn in trade period. Also there are many foreign companies with subsidiaries in the US. Since the overwhelming amount of demand comes internally they obviously locate here to sell to us but take the money. This is especially true in the energy space hence "an index fund includes foreign managers" whereas a trade deficit number does not. Simply put in spite of the media the USA is still the best place to locate capital. We'll see how China deals with its challenges going forward. They've been number two for some time now.

LawsofPhysics's picture

"Since the overwhelming amount of demand comes internally they obviously locate here to sell to us but take the worthless fiat"-  FIXED.  Didn't junk you BTW

kill switch's picture

 Recession Risks Increase????? Where in a fucking depression,, food stamps killed the food lines of 50,000,000.00 people...Down the fucking sink we go!!!

lolmao500's picture

And the ever lasting growing economy BS strikes again.

Pretorian's picture

US build its country on deficits in the history. Get a second thought.

LooseLee's picture

Uh, correction. Its a culture that needs to be removed (violently if necessary) from the consciousness of humanity....

PLove's picture

Easy solution:  cull population to meet available supply.

zorba THE GREEK's picture

Only rope will solve the problems plaguing this country and lots of it.

Sock Puppet's picture

A lot of you ZHs like yourself need to be detained indefinitely for mental evaluations.  The sky is falling is all bull shit.

Yen Cross's picture

 'Weak sales continue to be an albatross for the small-business community.  (Small Bussiness make up 70-80% of consumer spending.) All is well on Fantasy Island though. JPM is over $40 a share, and the Fed. is buying $50 billion in MBS every month.

HO-HO-FuckingHO "Happy Unicorn Day", everyone! (please insert helicopter in place of plane)/