International Trade Data for Dummies

This month’s International Trade report required an intensive study to understand the many dynamic factors it contained. On the surface, the play of the trade deficit contrasted with what would normally reflect a healthy American economy today. Few, save perhaps we econo-nerds, could see what was wrong and finally what was not so bad with it after all. It was full of information, so much so that no one specific theme could define our analysis here. We expect we can add some value to your perspective and entertain you in the process.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

International Trade Report

The trade deficit narrowed to $48.7 billion in May, meeting the consensus of analysts’ views. I suppose that’s where most market mavens moved on to the next news item, but while doing so missed some important information about the American economy and sectors within it. Of course, that information will affect the value of financial securities, so you patient and loyal followers just keep on reading and glean your reward.

The deficit narrowed from $50.6 billion in April, revised from $50.1 billion reported initially. That seems like good news to the naïve or to the idealists, but truth be told, we like the deficit here today, because it signifies a healthy American state of affairs. You see, we’ve come to accept the fact that America has grown into a fat consumer of goods and a provider of services and nonsense. As it’s still hard to sell services and nonsense to frugal and suspicious third-worlders who can more easily copy those anyway, and since the Europeans can’t afford anything any longer, we live and love our deficit.

What troubles me, though, is that as exports rose by just $0.4 billion, imports decreased by $1.6 billion, driving the deficit expansion. That means we bought less stuff, or the prices of the stuff we bought declined. Take note of that last point, because that’s part of what happened. Anyway, the narrowing deficit is not often representative of a healthy American consumption economy, nor does it reflect good news about Europe. Most recently, in a healthy American state, our imports tend to exceed exports in growth, driving widening deficits.

The long-term American dream, though, is that eventually our manufacturing sector might benefit from China’s growth by serving its burgeoning middle class. Unfortunately though, we cannot control how many illegal copies of American Idol winner Phillip Phillips’ Home MP3 are made and sold in Shanghai. As far as the benefit of the deficit, well we already enjoy low priced goods available at Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) made in China and thanks to importing.

Unfortunately, we left some workers behind who only knew how to make something we then outsourced to India or China. And the patriotic that stayed behind with their unionized labor ended up putting their firms underwater when they couldn’t compete with Chinese men, women and children working 24/7 for a quarter and a shoelace. We gave up some quality as well I suppose, and occasionally our kids chew on lead laden lollipops, but net-net, we’re happy campers chomping on McDonald’s (NYSE: MCD) and buying stuff we don’t need from Sears (Nasdaq: SHLD) or wherever else... right?

Guess what? We managed to sell some services and nonsense to third-worlders in May, like seminars on how to flip a foreclosure property; exports of services rose $0.3 billion in May. We bought some advice too, as service imports increased $0.1 billion; maybe we needed more yoga gurus around town so we could sell more lululemon (Nasdaq: LULU) gear.

But never fear, because a big reason why imports declined and the reason the trade deficit narrowed was probably not indicative of new trouble. In recent articles, I’ve recommended investors sell their industrial and basic materials shares, like Alcoa (NYSE: AA), Rio Tinto (NYSE: RIO), BHP Billiton (NYSE: BHP), Freeport McMoRan (Nasdaq: FCX) and Vale (Nasdaq: VALE). I was right by the way. So, what drove the decline in imports was a $3.6 billion decrease in the imports of industrial supplies and materials. I think that reflects the drop in industrial commodity prices, so never fear.

Looking at the trade with specific partners, the trade deficit with China expanded to $26 billion from $24.6 billion; okay, good enough. The deficit with the European Union expanded to $10.5 billion from $8.7 billion, but that was probably because of decreased European purchases of American exports rather than our buying of more imports. The deficit with OPEC narrowed to $11.2 billion from $11.5 billion, probably partly due to the isolation of Iran and declining oil prices. We’ll see more of that in June’s data, based on what we’ve just reported on in the Import and Export Price data. The increase in advanced technology imports ($3.1 billion) far surpassed the increase in technology exports ($1.1 billion) in May.

Clearly, things are changing fast, with fuel price decline speeding up in June and agricultural prices on the rise. China’s economic growth is likely slowing and as the unofficial EU recession seems to be getting even worse. U.S. economic data is showing signs of catching the EU cold, and so clearly delineated lines in trade data are going to be hard to find, as the global community slides together.

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