Weekly Economic Commentary

Week of September 3, 2013

Highlights

  •  Our exports to our two closest neighbors, Canada and Mexico (27%), are larger than our exports to the Eurozone, Japan, and China combined (25%).
  • Perhaps market participants (ourselves included) should pay more attention to the economic prospects for Canada and Mexico and a bit less time on China, the Eurozone, and Japan.
  • All else being equal, an unexpected and permanent shift higher in economic growth for trading partners like China, the Eurozone, and Japan, should, over time, boost U.S. exports to those nations, and, in turn, boost U.S. GDP.


Trading Partners
The upward revision to second quarter gross domestic product (GDP) garnered a great deal of market attention last week (August 26-30, 2013). The report, released on Thursday, August 29, revealed that second quarter GDP initially reported in late July 2013 as a 1.7% gain was revised higher to a 2.5% gain. All of the upward revision to second quarter GDP can be explained by a narrower trade deficit. Initially, the trade deficit in the second quarter was reported as $451 billion, a 0.8% drag on overall GDP growth. Now, the revised data show that the trade gap stood at “only” $422 billion in the second quarter the same as in the first quarter of 2013 and as a result, the economic drag from trade for the quarter was eliminated. Looking ahead to the third quarter of 2013 and beyond, market participants and policymakers are asking: Can trade make a significant positive contribution to GDP growth in the quarters ahead, given the outlook for growth in Europe, China, Japan, and emerging markets?

Click here for an infographic entitled, “Profile of U.S. Exports.” Note: All references to GDP indicate real GDP.

Tracking the Pace of U.S. GDP Growth
While second quarter GDP was revised higher, the first quarter was not subject to revision and remained at 1.1%, leaving GDP growth in the first half of 2013 at a tepid 1.8%. The Federal Reserve (Fed) is still forecasting a 2.45% gain in GDP this year. With 1.8% growth in real GDP in the first half of the year, real GDP would have to grow by more than 3.0% in the third and fourth quarters of 2013 to match the Fed’s consensus forecast for the year. The Fed will release a revised forecast for the economy, labor markets, and inflation for 2013, 2014, and 2015 on September 18, 2013 at the conclusion of the next Federal Open Market Committee (FOMC) meeting. The FOMC is likely to revise downward its 2013 GDP growth forecast. The new forecast, along with the release of the FOMC’s initial public forecast for the economy, inflation, and the labor market in 2016 (also due on September 18), may help to soothe market fears about the pace of tapering and tightening.
The data in hand for the first two months of the third quarter of 2013 suggest that third quarter GDP is tracking to well under 2%, and may be closer to 1%. The data released thus far for the third quarter of 2013 include:

  • Personal consumption expenditures for July;
  • Industrial production for July;
  • Retail sales for July and August;
  • Durable goods shipments and orders for July;
  • Vehicle sales for July;
  • Weekly initial claims for unemployment insurance through the week ending August 24;
  • ISM and regional Federal Reserve Manufacturing Indexes for July and August; and
  • New and existing home sales for July.

Click here for the LPL Financial Research Weekly Economic Calendar.

IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.
Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
Markit is a leading, global financial information services company that provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency. The Markit Purchasing Managers’ Index (PMIT) is a composite index based on five of the individual indexes with the following weights: New Orders – 0.3, Output – 0.25, Employment – 0.2, Suppliers’ Delivery Times – 0.15, Stocks of Items Purchased – 0.1, with the Delivery Times Index inverted so that it moves in a comparable direction.
The Institute for Supply Management (ISM) index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.
Challenger, Gray & Christmas is the oldest executive outplacement firm in the United States. The firm conducts regular surveys and issues reports on the state of the economy, employment, job-seeking, layoffs, and executive compensation.
This research material has been prepared by LPL Financial.
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