Problems In The US Far from Contained

First for the good news - yesterday (Tuesday) it was announced that the trade deficit fell to just 440.4 billion in November, a 28.7% decline from October. However, the decline was entirely attributable to lower imports, mostly lower oil prices. The value of imports dropped by $25 billion, or 12%, while the value of our exports declined by $8.7 billion, or 5.7%.

A lower trade deficit will help cushion the decline in GDP in the 4th quarter; that is a simple matter of arithmetic. However, declining imports and exports is not a sign of a healthy economy. Combined with some other data points, it looks like world trade is headed over a cliff. The Baltic Dry Index, which measures the cost of moving bulk commodities like coal and iron ore around the world, is 96% below the highs it reached this summer. No, that is not a misprint — it is a ninety-six percent decline.

If that’s not bad enough, now comes this item http://www.telegraph.co.uk/finance/4229198/Shipping-rates-hit-zero-as-trade-sinks.html showing that the cost to ship containers has fallen to zero. Clearly that is not a sustainable level, but it sure does not suggest much demand to move goods around the world.

Overall, trade among the major economies (measured as total imports and exports) was down 8% in November from a year before. That almost never happens — there has not been a year since WWII in which world trade actually declined. Granted, an 8% decline is a far cry from the 66% decline that happened during the Great Depression in the wake of the Smoot Hawley tariffs, but it is not a good sign.

The decline in trade is not confined to the U.S. (when you think about it, how could it be?). Some of the numbers coming out of Asia are even worse. For example, consider the following graph (below) of Korean and Taiwanese exports (two traditional export powerhouses). The data is presented as rolling 3-month sums to take some of the seasonality out of the data. Even in China trade is down 9% — although they, like us, are seeing their imports (mostly raw materials) fall faster than their exports. As a result the Chinese trade surplus might even grow this year.

The decline in world trade is not good news for big U.S. exporters like Boeing (BA) and Caterpillar (CAT), nor is it good news for shipping companies like Dryships (DRYS). It is better to hunker down in steady demand areas like Consumer Staples, Health Care and Electric Utilities.

It seems that hopes for a second half economic recovery this year are extraordinarily optimistic. Take a look at the people calling for it, and see what they were looking for a year ago. Most of them thought that all the problems were “contained” back then.

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