January Trade Figures Don't Look Good

 | Mar 07, 2017 | 12:00 PM EST
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The biggest drag on fourth-quarter GDP was net exports. That component fell $77 billion, the largest nominal decline ever. If you were hoping that it was a one-time aberration, then your hopes got a little dashed this morning as we just got January's trade figures and they were the worst in five years. You have to go all the way back to March 2012 to see a figure as bad as the $48.5 billion trade deficit the U.S. posted in January. 

Of course, net exports are only one component of GDP. There's still personal consumption expenditures, gross private domestic investment and government consumption expenditures and investment. 

The trouble is, the other three are not looking too good either. Real personal consumption expenditures ("real" meaning adjusted for inflation) fell 0.3% in January, and I hate to tell you this, but that's the worst print in seven years. 

Durable-goods orders were up $4.4 billion, a modest gain at best, but when you take out transportation, orders were flat; i.e., no gain at all. Construction spending was down $11.8 billion, the largest decline in nearly a year. And while we didn't get inventories yet for January, it pays to remember that inventories saw a huge increase in the fourth quarter of last year so it's possible that businesses will want to sell that stuff before stocking their shelves and showrooms further. 

So much for gross private domestic investment taking off. 

As for government consumption expenditures and gross investment, I have been following the fiscal flows and at least insofar as the federal government is concerned, spending growth has gone flat year over year. So it doesn't look like there was any appreciable pickup on the federal side when it comes to government spending. The states are another story. State and local spending contributed quite nicely to fourth-quarter GDP, but states are constrained by tax receipts and many states have announced cutbacks for the current fiscal year. We'll have to see. 

Add it all up and it doesn't look like first-quarter GDP will be anything stellar, maybe not even as "high" as fourth-quarter growth, which of course was not high at all. The 1.9% growth rate in the final quarter of 2016 was almost a 50% slower pace of growth than what the economy registered in the third quarter. 

Against this backdrop, we have stocks near record highs, an "air" of dot-com mania pervading, valuations stretched, bank credit decelerating rapidly, the White House under attack from the media, the opposition party and even members of its own party, and let's not forget the debt ceiling and budget (the need to raise the former coming up soon). 

Institutional asset managers have been driving this rally. They're net long almost 700,000 S&P E-mini futures contracts. This is a group with a horrendous track record. John Bogle, the founder of Vanguard and creator of index fund investing, basically made himself a billionaire by fading these guys. Since he knew the vast majority of asset managers fail to beat the market averages, he came up with the ingenious idea of index funds, which are designed to mimic the market averages. So, essentially, he was telling people to just fade the asset managers. You'll do better. 

So here's the question: Do you want to bet alongside a group that has such a poor track record? That's really what it comes down to at this point because the fundamentals are looking poor.

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