Is the Trade Balance Making Any Stimulus Ineffective?

This week the US Census released July 2010 trade balance results showing a slight improvement month-over-month. This decline is most likely imaginary – a result of data that is too noisy for any seasonal adjustment equations.

The trend lines show a gentle return to pre-recession levels.

In an op-ed in the NYT, Alan Tonelson and Kevin Kearns penned:

For many people, the trade deficit seems unrelated to the nation’s continued economic crisis. But it is actually a central reason why American growth has lagged and President Obama’s stimulus hasn’t led to a robust recovery: since February 2009, the government has injected $512 billion into the American economy, but during roughly the same period, the trade deficit leaked about $602 billion out of it and into foreign markets……

….Advocates of traditional stimulus measures, like increased government spending or tax cuts, rely on recovery models rooted in, respectively, the 1930s and 1980s. Back then government stimulus and tax cuts made sense because Americans spent almost all the new money on domestically produced goods and services.

For the last few decades, though, our growing trade deficit has undermined the relationship between spending and growth. Today Americans purchase so many foreign-produced goods and services that even large stimulus programs produce virtually no new net growth or employment at home.

This echos my sentiment – open trade borders leak. Stimulus done in one country alone will benefit its trading partners more – as they did not have to invest any capital to be stimulated. Only if the same stimulus is applied by all trading partners will America benefit by stimulus.

This op-ed rambles on with protectionist rhetoric. This flies in the face of conventional wisdom where free trade is one of the cornerstones of modern economic theory. My position is that any theory blindly applied will fail.

Free trade is one of the Achilles Heels of our economy. It has allowed foreign products to have an advantage on American soil. Free trade only works where no one has a tax, regulatory or currency advantage. It only works where the respective governments are not involved in business.

Other Economic Releases This Week:

This was a slow week for economic releases.

The USA economy is still growing but with widespread signs of deceleration – so says the Federal Reserve in their September 2010 Beige Book. The Beige Book is a compilation of surveys and anecdotal data produced by the 12 Federal Reserve Districts.   Beige Book is interesting reading, but does not carry the weight of other Fed surveys.

Credit card use in July 2010 continues to fall but overall the decline in consumer credit now has remained constant for the last three months.

In August 2010, same store retail sales increased 2.9% YoY following a July 2010 2.5% YoY gain, according to Bank of Tokyo-Mitsubishi UFJ (BTMU) data. I use this data as a proxy for the complete US Census data on retail Sales. Beginning in September (and just in time for elections), year-over-year comparisons will be based on relatively stronger “recovery” sales levels in late 2009. We could start seeing negative gains and the double-dippers will be out in force.

The initial unemployment claims this week was flawed due to incomplete data caused by the long weekend. Several States did not report. So the fall in initial claims needs to be ignored for now – tune in next week.

The Weekly Leading Index from ECRI remains relatively unchanged at -10.1. The WLI is a leading index which is used to forecast economic conditions six months from today. Historically, the index at this level foretells a recession.

Overall Economic View:

We continue to receive economic data piecemeal and react to each piece of news. ECRI, has not made a recession call based on the WLI. Predictions of double dip or depression are made daily. Professor Paul Krugman is now saying America will be lucky if it turns into the Japanese L.

Using modeling techniques of major corporations, a new forward looking index has been released. This index uses non-monetary economic pulse points that have a general – not specific correlation with Gross Domestic Product (GDP). These pulse points are geared to anticipate consumer and industrial income / spending for 30 to 60 days after the indicator is issued.

This index (EEI) uses relative scales in evaluating the economy – zero means tomorrow will be the same as today. The economic flows below retail level are still building, although the rate of growth is slowing. The strength of the growth peaked in February 2010, and the economic speed has dropped off roughly 15% by August 2010. But the economy is stronger today than most realize.

This index has a history of rapid change and has a three month negative trend line. However, the rate of decline is within a narrow range indicating no impending economic collapse. The EEI would have called the Great Recession in August 2007 (NBER date December 2007) and the 2001 recession in February 2001 (versus NBER March 2001).

The difference between the NBER and the EEI is that this index is determined within 25 days after period closing.  Most likely, the recession call would have been made in November or December 2007 – a full year before the NBER made the recession call.

Bankruptcies Filed this Week: None

Bank Failures this Week:

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