Friday, September 12, 2008

Terms Of Trade Strikes Back?

During the last five quarters, and by that I mean Q2 2007 to Q2 2008, the terms of trade adjusted GDP number that I have discussed frequently here has increased slower than the unadjusted headline GDP number that the financial press usually focus on.

This, and also the fact that nominal national income has usually increased a lot slower than nominal GDP, suggests that economic growth was likely a lot weaker than the headline number. Now during the third quarter this distortion will likely be temporarily ended. The reason is that terms of trade is highly correlated with the oil price, and since that has fallen significantly recently, terms of trade might temporarily start to strengthen for the U.S. By looking at the import and export price news release, it is clear that although terms of trade in the first month of Q3, July was weaker than 3 months earlier, it was stronger in August than in May. And the June to September change is likely to be far stronger, meaning that there is a high probability that terms of trade will actually strengthen in Q3, although not by much.

The bad news for the U.S. economy is that underlying economic growth hasn't strengthened, and so the implication of the stronger terms of trade is instead that the headline number will be a lot weaker. Negative volume growth therefore seems almost certain for Q3.


Anonymous Anonymous said...

May I ask your current view on the dollar?

1. Still in a bear market just waiting to continue it´s next down-leg?

2.Ina new bull market (for at least a year) but just now ripe for a downmove within that bull market?

3. New bull market, just going to continue up?

Best Regards,

10:33 AM  
Blogger stefankarlsson said...

I still think it is a sucker's rally which will end relatively soon. It is possible and even likely that it will continue for a few more weeks or even months, but it will certainly end before the end of the year.

5:20 PM  

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