Friday, January 11, 2008

Another Myth Falling Flat - Exports Will Save the Economy

Exports are 15% of the economy
Consumer Spending is (take your pick) 65% to 75%

The myth propagated in past half year is the ever weakening dollar is somehow good (or 'great!' depending on the pundit) because it will drive exports. In a country that is exporting less and less by the year. (but we still have coal) We are a SERVICE economy now - worse - a CREDIT BASED SERVICE economy. We've outsourced MUCH of the things we used to export in the 70s, 60s, et al. So I am unclear how 15% of the economy will make up for the other 65% but that is the myth. Maybe in the 1970s it would of been a different story.

But another myth that is getting debunked. Lost in today's news is (a) record trade gap and (b) import inflation. I talked about point (b) in December [Real Inflation Showing in Reports Not called CPI/PPI]. I cannot stress how important this is, since it feeds into my whole notion of "a new era of inflation" due to worldwide shortages. While the useless traditional government reports insist inflation is 3%ish, the real world figures are showing we are importing (and don't blame it all on oil - although it is a huge problem) products at a 10-11%+ higher price point than a year ago. December's figures were just as bad as Novembers. And this is why the consumer is feeling pinched. Wages cannot continue to go up 3-4% a year with "real world costs" going up 10-13% a year for things we "need" (food, energy) and cannot stop buying, without it causing problems. Serious ones. Especially for the "70%" of us who live paycheck to paycheck. The longer we put our head in the sand and continue down this path of believing 3% is 'real inflation' the longer it will take before we address the issue. Stagflation. I keep repeating it. And even when the economy recovers in a few years we are going to be in a permanent high inflation environment.

More worrisome is another theme I promoted in the fall, the export of inflation out of China. For a long time, the flood of products from China has been keeping a lid on prices. For the first time I have seen, we are now seeing costs rise (0.1%) out of China. 0.1% sounds like nothing but in years past it was a negative number and a large negative number at times. So as costs rise in China, its slowly going to begin to be passed on to the countries they export to. So yet another factor working against the US consumer.

We really need this Manhattan Project to try to move 20-30% of our energy source to renewables within a decade. And we needed to start it yesterday; basic supply and demand economics. The global demands on energy from emerging markets are not going to reverse even if the US goes into recession for a year or two. Even if oil "dips" to $75 temporarily this is not enough. Not when 2.5 billion people are coming into the industrialized world in the next 2-3 decades. If you don't believe in it as an environmental issue, you need to believe in it as an economic issue. And I don't mean corn ethanol, which is a disaster and in fact adding to the problems. Amazingly the only candidate talking about this from an economic standpoint was essentially laughed off the stage in last night's debate in SC. "It's just too complicated". Sad.

Trade Gap Widens on Surge of Oil Imports
  • A record increase in imported oil prices in November sent the U.S. trade deficit to its highest level in more than a year, the Commerce Department reported Friday.
  • The seasonally adjusted trade gap widened 9.3% to $63.1 billion in November, the largest deficit since September 2006. (despite a weak dollar helping exports) Economists surveyed by MarketWatch expected the trade deficit to widen in November to $59.5 billion
  • "The trade picture is almost grim for a country whose exchange rate has dropped as much as the greenback's has," wrote Robert Brusca of FAO Economics. "Any more dropping and they may have to rename it the 'yellow-back' for cowardliness."
  • Imports rose 3% to a record $205.4 billion, while exports increased 0.4% to a record $142.3 billion. Most of the increase was simply a matter of higher prices, however. In inflation-adjusted terms, the real trade gap widened by 4.2%, as real imports rose 1.3% and real exports fell 0.3%. It was the second straight decline in real exports, a troubling sign for an economy that's relying on export growth to offset weakness in housing, capital spending and consumer spending. (folks, that's important - exports are DECLINING in inflation adjusted dollars despite a dollar that is in a death spiral)
  • Jay Bryson, global economist for Wachovia, wrote that real net exports "likely made very little contribution" to the fourth quarter's overall rate of GDP growth. "Looking forward, exports should generally grow faster than imports, which should help to prop up overall GDP growth over the next few quarters," he wrote. (right, with the dollar at record lows it hasn't helped, but GOING FORWARD it should start to help - got it)
  • But the real trade gap widened 3% in November, even excluding petroleum. (don't blame it on oil, folks)
  • At the same time, imports have slowed because of sagging growth in the U.S. and because imports are relatively more expensive. The U.S. can't cut its demand for petroleum quickly in response to higher prices, however. (it's an addiction)
So that's the story on the trade gap but the story on inflation is here
  • In the past year, import prices have now risen by 10.9%.
  • Prices of imported goods from China rose 0.1% in December
So in a few weeks when everyone focuses on CPI, and PPI, both severely flawed reports... ignore the numbers (although you cannot ignore the fact the market reacts to those reports) and remember these numbers. We are importing 11% inflation. Even though the market chooses not to focus on this very important report.

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