MarketKapz

The U.S. economy has run a trade deficit every year since 1976.  While not all of the data for 2010 has been released, it is safe to say the record has not been broken.  The Commerce Department’s report on international trade in goods and services notched another month of deficits in November.  The good news is the difference in trade improved over October’s release.  By dropping a mere $100 million, November’s $38.3 billion deficit has replaced October place as having the second lowest monthly trade deficit in 2010.

The reduction in the trade deficit was aided as exports grew faster than imports.  For the month, exports improved by $1.2 billion while imports expanded by $1.1 billion.  Overall, however, things aren’t all that rosy; exports have grown $20.7 billion year-over-year versus imports which are up $23.7.

The take away from the report is that both imports and exports grew.  This illustrates demand has picked up both in the U.S. and foreign countries.  The fact that the trade deficit declined as we imported more suggests the rest of the world’s demand for our goods is growing faster than our demand for the goods and services others provide.  As we wrote in the last trade balance posting, October’s report benefited from a weaker dollar versus a basket of currencies.  November did not get the same currency tailwind as the dollar leveled out and ended the month stronger than it started, so the strength of this report is more likely caused by an actual global recovery instead of just dollar weakness.

I go through blue berries like Sherman through Georgia.  For years I have bought them at Trader Joe’s.  In the frozen section they usually have two brands, both packaged in identically sized plastic bags.  The house brand ran about $2.50 versus $2.20 for the other, but the former weighed 16 ounces while the latter hit the scale at just 12.  I figured the Trader Joe’s brand was the better bargain, and was quite pleased last week when I saw the house brand price had dropped to $2.00, until I noticed that it now contained only 12 ounces as well.  Essentially the company raised the price while giving the appearance of a bargain.

After a little investigation it appears that downsizing isn’t something that happens only with American corporations.  According to Consumer Reports, a package of Hebrew National franks now weighs 11 ounces instead to the tradition 12.  Haagen Dazs shrank its container size by 12.5%, just a hair more than the decrease seen in a tube of Lanacane.  A package of Kraft American is missing two slices nowadays.  Tropicana o.j. is 5 ounces lighter.  Even Costco has joined the circus; their Kirkland paper towels lost a total of 11.2 square feet.  We’re told by our government that there is very little inflation but paying the same for less sure seems like a version of it to me.

Gil Standard told me about an old timer he knew who farmed just outside of Normal up by Evergreen Lake.  The man said he experimented with his mule, reducing its daily helping of straw by just a few strands each day.  Said, “With a little luck,” he figured he “could break the beast from eating altogether.  Would have succeeded too if the dang things hadn’t died.”  We consumers seem to be on somewhat the same type of diet.  It won’t likely end until enough of us kick up a fuss, but be careful.  That’s when inflation could become very readily apparent in a hurry.

Many times an indicator tells the story of events that have already taken place.  Take Gross Domestic Product (GDP) for instance. It narrates what has happened during the three months before its initial release. By the time the final revision has been made, some of the data is 6 months old.  The Census Bureau’s Durable Goods Orders (DGO) is slightly different as this report provides a look at the past as well as a glimpse of things to come.

The report illustrates orders of items that will last for longer than three years.  These orders will need to be manufactured.  In the month of November, the core DGO increased by 2.4% for the month. This gives an indication of the health of business investment.  As businesses become more confident in the strength of the economy, they are more likely to invest in equipment.

Another part of the report looks at the number of previous orders that were not completed. These unfilled orders have grown in eleven out of the last twelve months.  These orders will need to be completed before the newest orders are started.  If this bottle necking continues, manufacturers will adjust by either increasing prices, investing even more in equipment, working employees for longer hours, or hiring new employees.  If one or a combination of the last three occurs, it will add to the current cycle upswing.  Overall, this indicator is providing evidence of an economy that has room to grow.

Recently I introduced the Standards to you, a family of four living in Normal, Illinois.  You may recall Gil was 5’10” tall, while Pam stood 5’6”.  The twins were 18” long when born.  Statistically speaking the family averaged 68” in height before the kids were born, but just 43” the day after that blessed occasion.  Growing by 6 inches each in their first year, the average family member’s height increased to 46” in just 12 months, a substantial 7% growth rate!

While this may not make a whole lot of sense to you on the surface, when I relate it to economics, it is easy to understand why that field doesn’t make much sense either.  What we have here is a data set that can be viewed in different ways.  We may look at it as a diffusion index which, upon examination, reveals out that all the growth was just in two of the four components, Jim and Sue.  The Institute for Supply Management report upon which we report monthly is such an index.  We can also see it as a breadth indicator since half the components are exhibiting strong growth.

Nevertheless, the conclusion that everyone grew by 3” in one year still seems flawed.  Economists will call this asymptotic and best illustrate it as follows: ʃ(n) = n squared + 2n.  In part this explains why they are shunned at cocktail parties.  A problem with the data occurs when a variable (like that n squared thingy in the formula) dominates an indicator to such an extent that the conclusion becomes flawed.  Since blogs like this may explain, in part, why your Atlas crew gets shunned at cocktail parties, we can ask, “Is this really important?”  Well, what if the Fed’s monetary printing press which, last year, apparently averted the much feared double dip, proves to be such a variable?  When the money does run out, could that cause us to revisit the lows of 2010, even 2009, again?  Thought like that could turn a fella to drink.  Unfortunately that’s precisely why no one will invite us to their party.

The Institute for Supply Management (ISM) releases two reports each month.  The first provides details on manufacturing, that portion of our economy which is particularly sensitive to the economic cycle.  The second report, covering services or non-manufacturing, represents a much larger portion of our overall economic activity.  Both sides have had a string of growth that continued in December.  Manufacturing put in its 17th consecutive month and non-manufacturing improved for the 12th consecutive month.

The manufacturing report indicated growth in 11 of its 18 industry groups.  Apparel led with the largest total growth, and was at the head of the class in new orders as well.  This suggests retailers expect consumers to keep buying clothes.  New orders are the forward looking part of the report and they continued their climb while expanding faster than the previous month.  They have been moving positively for the last 18 months.

New orders on the non-manufacturing side have been positive for 16 months and also grew faster in December than in November.  The employment index grew for the fourth consecutive month but was not able to keep up the pace of November.  Employment in mining, retail trade, and information services grew the most in December.  According to 35% of the non-manufacturing companies, prices for goods and services they use increased.  This hints at inflation so we will keep an eye out for it.

Overall the ISM reports are encouraging. The manufacturing report tells us the cycle is still expanding.  The non-manufacturing portion, which is about 80% of our economy, is confirming the evidence of expansion by gaining momentum for the fourth month in a row and ending the year with the highest reading of 2010.

Despite their ubiquity in pet stores, Chinchillas don’t seem all that suitable as pets to me.  I’m not trying to pick a fight with any breeders’ association but they are nocturnal whereas I am not. Their teeth never stop growing and they can reportedly live for twenty years!  Originating in higher reaches of the Andes, they like cooler weather.  Seems to me adopting one makes about as much sense as taking in a polar bear.  Finally, I’ve heard rumors that, when startled, they will eat their young.  Hardly a sensible way to perpetuate the species.

It is to this last point that I would draw your attention and a metaphor: Americans too seem to be eating their children.  Hot on the heels of a severe spanking by voters, Congress decided to increase deficit spending by hundreds of billions of dollars while cutting off some of the government’s revenue sources.  They continue to engineer a Ponzi scheme of immense proportion where just paying the interest on multi-trillion dollar loans will have adverse effects on our future generations.  At some time in the future it may well cause domestic wages to lag increases in the cost of living, the result of deterioration in the U.S. dollar’s value, and upward pressure on interest rates.  Presently it seems when retirees and Baby Boomers become seriously concerned that their benefits may be cut or otherwise eroded by new legislation, their incensed clamor causes Washington to panic.  The solution is to create more debt, pushing the burden onto our children who will someday be faced with a mountain of debt which could become insurmountable.  One way or the other, they will pay.

Allow me to change the subject, please!  Here are some other things you might not know about Chinchillas, an Andean word for “little Chinta.”  No one seems to know what a Chinta is.  As a paragon of information, we might ask Martha Stewart.  She is rumored to own 15 of the little critters in their natural state.  I don’t know how many she owns sewed together for lounge wear (if any).  They bathe in volcanic ash or dust, thus supplying them with a suitable environment for sanitary pursuits may prove more difficult than Homo Habilis’ quest for fire.  Finally, they can grow somewhere between 50 to 100 hairs from each follicle in their skin, making them an ideal source for hair plugs when I finally tire of my pinkish pate.

The Bureau of Economic analysis released November’s figures for personal income and outlays.  This indicator provides insight into the health of consumers.  Since our economy is largely driven by household consumption, this indicator is worth watching.  The nation’s personal income grew by 0.3% or $42.3 billion.  Some of the income goes to pay taxes, and the left over makes up disposable personal income. This is the portion that can make its way into the economy, and it increased by $37.8 billion.

The second portion of this report indicates how much money the nation is spending.  The personal outlays grew by $43.3 billion or 0.4%.  The primary driver of the increase came from services that grew by 0.4%.  Expenditures have been climbing for five consecutive months after slipping in June.  While it is unlikely to move up every month, the trend is headed in a favorable direction.

Also moving higher is the Federal Reserve’s favorite inflation indicator.  The month-over-month Personal Consumption Expenditure price index grew 0.1%. The core price index (a measure of inflation excluding food and energy) grew by the same amount after showing no change in October.  The year-over-year change of the core index was 0.8%.  With a dual mandate of full employment and stable prices, the Fed does not have a reason to change its policies while inflation is this low and unemployment remains over 9%, so we are not concerned with the Fed crashing this party any time soon.