Economic First Look: Signs Point to a Healthier Trade Balance

 | Feb 02, 2013 | 10:30 AM EST  | Comments
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Monday

  • Factory Orders, 10 a.m. (all times EST)

Tuesday

  • Institute for Supply Management Non-Manufacturing Index, 10 a.m.

Wednesday

  • Energy Information Administration Petroleum Status Report, 10:30 a.m.

Thursday

  • Chain Store Sales, released by each retailer in the morning with media tally following
  • Jobless Claims, 8:30 a.m.
  • Productivity and Costs, 8:30 a.m.
  • Consumer Credit, 3 p.m.

Friday

  • International Trade, 8:30 a.m.
  • Wholesale Trade, 10 a.m.

This week will see only a modest amount of top-tier economic data, but there is still plenty to pore over. For example, while everyone seems to focus on the Institute for Supply Management's manufacturing survey, remember that this sector comprises only 11% of the U.S. economy. The far-larger services patch -- the area that might produce the most new jobs -- is covered by the ISM non-manufacturing index, which is due Tuesday. This report is always a very good read, and it can help us divine what we might expect in other releases.

For example, you may remember me harping about the "inventory correction" for the past few months. Between the lines of the ISM non-manufacturing report is where we saw that wholesalers and retailers viewed their inventory levels as "too high" and wanted to hold back on adding more stock. What did we see in the gross domestic product report this past week? You guessed it: the inventory correction that subtracted 1.27 percentage points from GDP, and was responsible in large measure for its slight 0.1% contraction (along with the federal-defense-spending cutbacks and trade).

Speaking of trade, data scheduled for Friday will provide a good breakdown of international trade covering December. You will note that these data are released after the GDP report. Also, yes, you're right about the first GDP estimate -- this "advance" read from Jan. 30 did not include the actual international trade data for December. It was only an estimate. So pay attention to Friday's data, as these numbers can clue you in on the next GDP estimate, the "preliminary" read, due Feb. 28. That report will include the more complete numbers for international trade.

What do we know so far on exports and imports? For the former category, we might be most curious about goods exports, so let's take go back and a look at December's ISM manufacturing index. As for imports, we might want to see what wholesalers and retailers are buying from abroad, so we'll glance at the December ISM non-manufacturing index.

In the December manufacturing survey, we see that ISM's new-export-orders index registered at 51.5, or 4.5 points higher than the 47 reported in November. This month's reading represents the first month of growth in the index since May 2012, when the index had registered at 53.5. This is a good sign, and it speaks to perhaps healing markets overseas. It is not what I would call "robust" growth, but at least the direction is positive.

Since manufacturers import parts for goods which they proceed to make in the U.S., and which are then sold both domestically and overseas, the ISM-Manufacturing imports index is also instructive -- not only for trade data, but for the general health of the sector more broadly. ISM's imports index registered 51.5 in December, or 3.5 points higher than the 48 reading reported for November. It represents the first month of growth in the index since the July 2012 reading of 50.5.

This is also a positive sign, because at least some of those imported components are then used in the production of other things stateside. It means manufacturers might be planning to make more things -- and we did, in fact, see that manufacturing activity increase in January by 2.9 points to 53.1, according to a report released Feb. 1.

As for imports, the ISM non-manufacturing index suggests imports have decreased: The imports index contracted in December for the fourth time in the last six months. The reading, at 49, is 6.5 points lower than the 55.5 reported in November.

It's instructive here to look at the industries reporting growth or contraction. For instance, note that wholesalers and retailers reported a drop in imports -- and imports to these groups tend to be in the more widely followed "goods" category, rather than in "services." (Some of the other categories, meanwhile, reported no change or an increase in imports.)

The reason for this drop among wholesalers and retailers may be due to inventory sentiment. Far more services companies have reported inventories as being "too high" (24%) than "too low" (8%) -- and wholesalers, as a group, fell into the "too high" category, so they are likely to import less. However, we do see an uptick in total new orders across all industries, including among retailers: The metric came in at a strong 59.3 -- up from 58.1 in November -- meaning that sales are strong and improving. So the drop in import orders (likely for resale) probably isn't due to weaker sales expectations.

So if these ISM reports are a guide, we could see an improvement in the trade balance, with exports for goods potentially showing a bit of growth and imports mixed, depending on whether you look at manufacturers (up) or retailers and wholesalers (down). Of course, the ISM reports are sentiment surveys -- they are not measured in hard goods or dollars, as is the case for this week's international trade report. Bear that caveat in mind, as estimating international trade figures from other economic data is an imperfect exercise.

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