Economic Survey October 2009

I considered digging my Businessweek out of the trash for an easy layup of a post, but instead I wanted to look at a survey of some current economic data points.

1st I saw this at Calculated Risk earlier this week. I highly, highly recommend his blog. He does some analysis but he always has good data and charts for the periodic economic reports that various government agencies generate each month. This is the JOLTS survey.

from Calculated Risk
What's important to note here is how the graph works with the blue line and the green & red bars being the most important. The green and red make up the loss of jobs. The green is persons who have quit and the red is the layoffs. The blue is the amount of hires. Obviously when the blue line is above the green and red column the economy is adding jobs.

When I read the chart it is telling me the turnover in the economy is slowing. Both hiring and loss of labor is slowing down and there is also structural unemployment as workers switch from housing and finance related careers to healthcare and government roles. People are not leaving their jobs for new opportunities, it seems as everyone is hunkered down. This is especially bad for young people who are trying to enter the workplace with their new degree (Bachelors and Masters) in hand. As the turnover falls people are not advancing upwards creating new entry level jobs. Some anecdotal evidence is here, and here.

The yellow line represents job openings. Obviously more data points would be helpful, this survey was only begun in 2000 but job openings at its lowest level does not portend well for the economy.

Second on my economic survey is the trade data. Again Calculated Risk did the heavy lifting with the charts.

1st We look at it on an absolute level. The drop in trade is breathtaking. However, the economy has also grown in the past 15 so we should look at this data in real terms as well. I should probably do this myself but I am lazy and will just tell you that it isn't any worse than it was in 2002 in "real" terms as a percentage of GDP. Here is a chart I found after a minute of Googling.

Here is my updated chart from the BEA.


So it reaches about 5% and has now contracted back and expected to do so in the near term. However, the near term means about 5 years. Here is what happened this month.


via Calculated Risk
You should enlarge the chart to get a good feel for it. Here Calculated Risk has shown the deficit in goods/services with oil removed, oil by itself and then the total. So even though the data point is improved overall (blue line) it was because oil was cheaper in this month. We actually imported more goods/services. [The removal of oil is because of this line of thinking: oil will be whatever it has to be because it the lubricant of the economy, so we should remove it to see what the underlying consumer is actually doing.]

Maybe a few brown shoots but I still don't see the green shoots.

Currently my trading model has longs in equities emerging and domestic, real estate US and ROW, bonds both emerging and domestic, gold. Shorts are in commodities and managed futures. However, I expect that this stance will not last very far into the new year.

NX, what I've been missing

So, quite a few of my posts were about the model of the economy with no imports or exports. This was so that I could more easily investigate nuances of taxation, savings and investments. However, as most economies are not closed off to each other the model is only good for introductory looks at an economy. So to add to our burden we must now investigate the flow of goods and its effects on money and monetary policy.

1st the basics
Exports - goods/services produced domestically that are sold to foreign countries
Imports - goods/services produced abroad and consumed domestically.
Net Exports - the positive or negative value when comparing a country's imports and exports. If it imports more than it exports it has a trade deficit.

Conversely, if it exports more than it imports it has a trade surplus. This is called a country's trade balance. There are numerous factors that affect why a country should run a deficit or surplus some include:

• exchange rates
• tax policies
• wealth of citizens
• price of goods
• and, preference of citizens

The above chart shows the US trade balances from 1960 to 2008. The blue area is when the US ran a trade surplus and the red area is when it has run a trade deficit. The purple area is the null area where imports and exports equal each other. (Also in later years it is merely the exports as imports dwarf exports from 1976 onwards.) It is plainly obvious that the trade has become an increasingly large proportion of the economy. It is also true that the imports have become a larger portion of the economy than exports, you can draw your own reasons from the ones listed above as to why imports have grown more rapidly than exports.

Most economists would posit that trade has increased because of the better supply chains that have been initiated from standardized Twenty-foot equivalent units, that can be transferred onto trains, ships and trucks almost effortlessly, to universal product codes have helped make the world a global economy. Telecommunications and technology have intertwined to support the logistics of multinational corporations. Increasingly technocrats have listened to economists' advice that free trade will bring gains to all sides. All have contributed to why trade has grown to a larger portion of GDP.

There is another way that countries trade with each other and it is with financial instruments. A term called net capital outflow (NCO) works exactly like NX. So instead of an import it would be a purchase of a financial asset by a foreigner; conversely a purchase of a financial asset by a US citizen would be an export. So when a foreigner purchases either a factory or US treasury bill that represents a decrease in net capital outflow. The purchase of a factory would be a foreign direct investment and the purchase of the treasury security would be a foreign portfolio investment.

The reason it is important to consider NCO and NX together is that they form an identity, that is, NCO=NX and vice versa. They must equal each other. Here is an example to help think about why it is so.

Say you purchase a BMW from Germany, you even make a vacation of it. So you bring an import to the United States and in exchange you give the German company US dollars. That is net exports have decreased for the United States and decreased the net capital outflow.

Now BMW cannot use the US dollars to pay their employees. So maybe they would instead use their new dollars to buy an automobile assembly robot in the United States. This would increase the net capital outflow of the US and also increase exports, thereby increasing NX.

Tomorrow I will explore how this affects savings and then work on a model to show how this is affected by real interest rates.