Thursday, December 15, 2005

Mixed Economic Reports

The U.S. Economy continue to deliver mixed economic reports. On the one hand, the trade deficit rose sharply during October to a new record of $68.9 billion, contrary to the expectations from most economic analysts -including me- that it would fall. Given the fact that the trade deficit is a full $11 billion higher than in July and $8 billion higher than the third quarter average, this means that even if the deficit falls back (as is likely) in November, trade will generate (in purely statistical terms) substantial subtraction to GDP for the fourth quarter.

On the other hand, consumer prices fell more than expected as a result of sharply falling gas prices. That in turn means that even the likely weak nominal growth in consumer spending will amount to a very strong real spending growth number. That in turn means that consumer spending might just make it above the zero level.

Together with a build-up in inventories,continued strong investment growth and rapidly growing government spending this means that despite the statistical drag from the rising trade deficit, the U.S. economy will certainly grow during the fourth quarter, although clearly far below the third quarter number. This view is also supported by a number of unexpectedly strong reports today on the maunfacturing sector. While U.S. growth have very shaky foundations, it have not ended yet.


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