For Immediate Release
Chicago, IL – November 11, 2010 – Zacks.com Analyst Blog features: DuPont (DD), Bristol Meyers (BMY), Wal-Mart (WMT), Chesapeake (CHK) and EnCana (ECA).
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Here are highlights from Wednesday's Analyst Blog:
Trade Deficit Improves a Bit
On a year-to-date basis for the first nine months of the year, the total trade deficit is up an astounding 82.97% to $379.12 billion, with the goods deficit up 34.1%, somewhat offset by the service sector surplus rising 16.8%. Then again, trade in goods simply swamps trade in services.
All things being equal, it is better to see trade going up than down. We want to see both exports and imports growing, but given the massive deficit we are running, we need to have exports rise dramatically faster than imports, or actually see imports fall.
A big part of what made the Great Recession into a global downturn was an absolute collapse in global trade. In the Great Recession our imports collapsed faster than our exports, and so we had a very big improvement in the trade deficit. That was just about the only thing keeping the economy on life support during those dark days. For example, in the first quarter of 2009 the smaller trade deficit increased growth by 2.64%. If not for that, the economy would have shrunk by 9.0% instead of by 6.4%.
Thus, growing world trade is a good thing, but not if it comes at the expense of an ever-rising U.S. trade deficit. On the other hand, had it not been for a dramatic deterioration in the trade deficit, in the second quarter of this year, GDP growth would have been over 5%, not 1.7%. In the third quarter it would have been 4.0% rather than 2.0%. The somewhat better-than-expected trade numbers for September increase the chances that when the next peek at the third quarter GDP numbers come out, the number will be revised up a little bit.
The sort of growth the economy is generating if the trade deficit is excluded is robust enough to start to produce significant numbers of jobs. Of course, though you can't just ignore the trade deficit. ("Other than that Jackie, did you have fun on your trip to Dallas?")
The trade deficit is a far more serious economic problem, particularly in the short to medium term, than is the budget deficit. In the third quarter, the increase in the trade deficit subtracted a full 2.00 points from the economic growth rate. If we had somehow managed to keep the trade deficit at the same level as in the second quarter, then second quarter growth would have been 4.0%, not 2.0%.
The trade deficit is directly responsible for the increase in the country's indebtedness to the rest of the world, not the budget deficit. That is not just a matter of opinion, that is an accounting identity.
Think about it this way, during WWII the Federal Government ran budget deficits that were FAR larger as a percentage of GDP than we are running today, but we emerged from the war the biggest net creditor to the rest of the world that the world had ever seen up to that point. Then the Federal government owed a lot of money, but it owed it to U.S. citizens, not to foreign governments.
Slowly but surely the trade deficit is bankrupting the country. While most of the foreign debt is in T-notes, try think of it as if we were selling off companies instead of T-notes. This month's trade deficit is the equivalent of the country selling off DuPont (DD), while last month's deficit was the equivalent of selling off Bristol Meyers (BMY). How long would it take before every major company in the U.S. was in foreign hands if this keeps up indefinitely?
Put another way, if the September trade deficit were maintained for the full year, it would total $528.0 billion, which is almost as much as all the firms in the S&P 500 earned, worldwide, in 2009.
Goods Deficit & Oil Addiction
The goods deficit has two major parts -- that which is due to our oil addiction and that which is due to all the stuff that line the shelves of Wal-Mart (WMT). Of the total goods deficit of $56.87 billion, $21.57 billion, or 37.9% is due to our oil addition.
The monthly improvement in the goods deficit came mostly from the non-oil side, where the deficit fell to $33.92 billion from $35.98 billion, but still well above the $25.35 billion level of a year ago. That is a deterioration of $8.56 billion or 33.8%.
The oil deficit fell by $392 million on the month, from $21.96 billion to $21.57 billion, a 1.8% improvement. Relative to a year ago, oil side of the deficit rose by 5.1%. For the first nine months of the year, the non oil deficit is up by $59.59 billion or 26.9%, while the oil side is up by $58.23 billion or 40.7%.
The oil side should be the low hanging fruit to bring down the overall trade deficit and thus help spur economic growth. Oil is primarily used as a transportation fuel. But the technology exists and is widely used abroad to use natural gas to power cars and trucks. Thanks to the emerging shale plays, we have ample domestic supplies of natural gas, and on a per BTU basis, natural gas is selling for the equivalent of oil at $25.02 per barrel.
The Chicken & the Egg
We need to get past the chicken and the egg problem of nobody wanting to buy a natural gas-powered vehicle because there are no convenient places to refuel, and gas stations reluctance to install refueling stations for natural gas powered vehicles since there are not many of them on the road.
Not only would such a move save money for drivers in the long run (there is an upfront capital cost as natural gas powered engines are more expensive than regular gasoline powered engines), but it would substantially reduce our trade deficit. Since it is a domestically produced fuel (and most of what we do import, we import from Canada) there is also a huge national security argument for moving to using more natural gas.
The dollars we send abroad to pay for oil imports are simply the tip of the iceberg when it comes to the overall cost of oil. A substantial portion of the Pentagon budget is devoted to keeping the oil flowing in the Middle East and the sea routes open. While I don't think that oil was the only reason for our being in Iraq, it is clearly a significant factor.
Natural gas is also a much cleaner fuel and emits far less CO2 than does gasoline. Thus it would be a very useful step towards stopping global warming.
Doing this, especially breaking the chicken and the egg problem, will take federal government leadership. The benefits for the economy however, would be huge. It seems inevitable to me that it will eventually happen, and when it does, it will be a great boon to major natural gas producers like Chesapeake (CHK) and EnCana (ECA).
The timing of it happening is very uncertain, but the sooner it happens, the better. I don't want to minimize the cost of doing so, particularly in terms of water quality. We need to do more research on the chemicals used in fracking operations to get at the shale gas (starting with getting rid of the trade secrets provision that allows the firms to hide exactly what they are putting into the ground and potentially the groundwater). Still, it strikes me as a trade-off worth making.
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