Global Slowdown Affects US Trade

The widening of the US trade deficit is not unexpected given the travails of the global economy. The US manufacturing community continues to seek out new markets and has continued to take advantage of the weaker dollar as they expand their reach but they can’t overcome the fact that many of the nations that have been export destinations for the US are wallowing in their own economic crisis. The demand for US goods in Europe has been tumbling all year and now there is evidence that growth has slowed enough in Asia to affect the US producer. The trade deficit expanded for the first time since March – moving from 41.9 million to 42 million. The trade numbers with Europe were off significantly – 6.6% from the previous month. Given that the

US once counted Europe as 25% of its export market and 25% of its import market this decline hurts.

At the same time that business with Europe has slowed there have been similar declines in the level of exports to Asian and Latin American trade partners although the declines thus far have not been as steep. The European slump is actually costing the US far more than it would appear. Not only does the US lose out on its ability to sell to the Eurozone nations but so does every other country in the world. The Latin states once counted the most troubled nations in Europe as their best customers but there has been a profound collapse in trade and that means that the states of South America have less with which to buy products from the US or

anywhere else. The slowing Chinese economy has cost the nations that once sold their commodities to the Chinese and that translates into less purchasing of US goods from countries such as Australia, Canada, Chile, Brazil and many others. This is a vicious cycle that only trends downward.

If there was any sort of silver lining in the latest trade numbers it has been that import prices fell a little as the price of crude oil was a little less in July (but then it started to climb again in August). The US manufacturer has been able to protect their domestic market a little better these days as the dollar weakness makes it hard for other nations to compete but the truth is that most of the other global currencies are weak as well and that makes the dollar a lot less protective than it has been.

Analysis: For the last few years the only bright spot for the economy was in the export numbers. The US manufacturer and the service providers had been taking full advantage of the weaker dollar and the continued expansion of other economies and there were export records set month after month. Now that the rest of the world is slipping into their own version of economic slump the US is losing access to that new found market and the impact on US growth is significant. The expectation is that there will be growth in the last six months of the year that will crest at no more than 1.4% - down from the 1.7% that had been projected earlier. It is all but certain that the GDP growth for the year will be around 1.5% and that is awfully anemic for an economy that was supposed to be heading for some kind of recovery by now. This is not entirely the fault of the US given that the decline is attributable to the slide in exports but here is where the interconnections come into play. The nations that buy from the US can’t do much purchasing if they are not selling.

Armada Corp. Intel.

PMI Data Worldwide Paints a Pretty Unpleasant Picture

The latest round of data derived from the numerous Purchasing Manager’s Indices is not exactly shocking but there is not much good news in these PMIs either. For all intents and purposes the readings for the major nations were flat although the drop in China was far more significant than many analysts had expected. The biggest worry emerging from the collected PMI numbers stems from the data on the future expectations from industry.
 

It is useful at this point to remind the consumer of data just what the PMI measures and how that measurement is obtained. The PMI is a survey and there are several organizations and companies that conduct these surveys. In the US the dominant PMI data is provided by the Institute for Supply Management but in the rest of the world there are government sponsored versions and many from private analytical outfits like Markit. In some nations there are more than one survey conducted and by different groups. Not surprisingly these different groups sometimes get different numbers. Right now the PMI that is conducted by the ISM is registering 49.6 – somewhat below the magic 50 reading that separates contraction from expansion but the Markit reading is at 51.5 and is slight.ly higher than the July reading of 51.4. Is one of these accurate and the other inaccurate? No, they are both essentially telling the same story as there is only a point or two between them. The point is that these are surveys and not collections of traditional data.
 

Analysis: Both the ISM and Markit (and all the others) use the same system and technique. This approach has become so common that there are any number of surveys that are based on the same methodology. In the case of the PMI the premise is that the purchasing manager in any given organization has their finger on the pulse of the company. If the purchasing manager works for Toyota or Ford they are going to be buying everything from steel to parts. The purchasing manager of a law firm will be buying office equipment and technology. One way or the other the person making the decisions about what to buy will be right in the middle of the company’s strategic plan and will know whether there is planned expansion or contraction. Granted, they are not the people that are necessarily making the decision to buy but they will know about it and the questions that come with the survey are simple – three options for each.

 Is there more activity, less activity or about the same? The intent is to make the survey easy enough that many thousands of people will take the time to respond. It is the sheer number of responses that give the survey its validity.

 

The latest PMI for the US (as reported by the ISM) is under the 50 mark. This level of the survey has been linked to a break point in the economy but be aware that the numbers are not all that precise. It matters greatly if the survey registers a 55 instead of a 45 but it is not such a big deal if the survey is 49.6 or 50.6. That can be a standard statistical error. As with every other survey the real news is in the longer term trends. For the US PMI the trend has been weak and that weakness has extended over several months now. For almost all of 2011 the PMI numbers trended positively and that was where they were at the start of this year. At the time of the “spring swoon” these numbers began to decline and throughout the summer the situation deteriorated. The big question now is whether the slump extends into the rest of the year and thus far the data on new orders has been anything but encouraging.
 

The US PMI is not the only significant index as there has to be recovery in other key markets for any kind of global recovery to take place. It is not shocking that Europe’s PMI is as weak as it is but the Chinese PMI is another issue altogether. At the start of the year it was anticipated that China would see some decline in its manufacturing sector due to the fact that aggressive steps had been undertaken to deal with the inflation threat that had appeared at the end of last year. The assumption was that China had managed to slow the economy deliberately and they could just as deliberately speed it back up again. That has proven harder to do than anticipated and the Chinese PMI has now been under that 50 mark for the past five months. The Market numbers have actually been a little worse than the official numbers that have come from the Chinese government version of the PMI.
 

In all of these PMI readings the largest declines have come from the new order readings. They are way down and far below what would be expected for this time of year. The surveys that are conducted by Markit and the ISM and others are not open ended and do not generally collect much information that might tell a researcher why an industry is reacting one way or the other. That kind of explanation would generally have to come from other investigations. Thus far it looks like there are two dominant concerns as far as the manufacturer is concerned.
 

The most important of these concerns has been expressed repeatedly and insistently over the last couple of years but there is little that would suggest that anything significant is going to change soon. It is the uncertainty factor. The fact is that business lives with a certain amount of uncertainty all the time. That is the nature of the competitive world. One never knows what will motivate the consumer and one never really knows what the competition has in mind. Even though these are factors that create a level of uncertainty there is some measure of predictability. One’s competitor is not going to price themselves out of business and there is a

limit to how different their strategies can be from one’s own. The consumer is somewhat predictable as well. If they are stretched as far as their budget is concerned they will not spend and when they feel flush they will consume more. Business learns to read the signals that will determine the behaviors of their consumer.
 

The part that is not predictable is that of government. The fiscal cliff is just the latest in a long line of decisions that are delayed to the last minute – raising the debt limit, reacting to a rating’s agency downgrade, stimulus packages, bank rescues, health insurance reform, bank reform, consumer protection, global climate change reactions. The list is really very long and every one of these decisions will impact what a business can and can’t do. It also affects the resources that consumers have available.

Armada Corp. Intel.