COMMERCE REVISES TRADE DEFICIT FIGURES UPWARD

NEW HOME SALES TREND IS UP

COMPOSITE CONFIDENCE INDICATOR AT 7-MONTH HIGH

A SUB-PAR READING IN THE CHICAGO ECONOMIC INDEX

The Bureau of the Census and the Bureau of Economic Analysis, through the Department of Commerce, announced today that total January exports of $66.597 billion and imports of $76.864 billion resulted in a goods and services deficit of $10.267 billion, $3.309 billion more than the revised figure of $6.958 billion for December.

In today's news release, the Commerce Department revised all the monthly numbers for 1995 with the result that the foreign trade deficit for all of 1995 was revised upward from $111.042 billion to $111.505 billion--still the highest yearly total since 1988.

In past reports I mentioned that there appeared to be a dropoff in the monthly deficit number beginning last August. Based on the newly revised numbers, the average monthly deficit from January through July 1995 was $10.459 billion. From August to December 1995, the monthly average dropped to $7.657 billion. Today's reported January number jumped right back up to the pre-August level.

Some of the more sensation-seeking elements of the popular financial press seized upon the change in the deficit figure from December to January and called attention to the fact that the number had risen by 47.5 percent on a month-over-month basis. But, one month's data is simply that--data for only one month. Most of this month's rise was accounted for by a decrease in exports of commercial aircraft (always a highly variable factor) and an increase in fuel oil imports (remember the Great Blizzard of '96). Let's take a longer term perspective and look at the 12-month period ending with January. When we total up the monthly deficits for that period we get $111.523 billion--a little more than the already very-large number for all of 1995. Now that, to my way of thinking, is a truly sensational number.

In case you've forgotten why the trade deficit figure is important, it's because the trade deficit enters directly into the calculation of the Gross Domestic Product (GDP), the ultimate measure of the health of the U.S. economy. If somehow the trade deficit for 1995 could have been reduced to zero, then the growth in GDP for 1995 would have been 3.7 percent instead of 2.1 percent.

In another Commerce Department report today we learned that sales of new one-family houses in February were at a seasonally adjusted rate of 700,000 and that this was 1.27 percent (+/-11) percent below the revised January rate of 709,000. The February number is only preliminary. Notice the wide bracket of uncertainty on the estimated percentage change. According to the Commerce Department's report this is because the new home sales figure is estimated from sample surveys, and the surveys are subject to sampling variability and errors of response and nonreporting. The report goes on to say that this month's preliminary estimate may be revised later by, on average, +/- 5 percent. The report states further that month to month changes often show irregular movement, and that it takes 4 months to establish a trend in the data.

So, what we've learned from all this is that the change reported for the current month is essentially useless. But, if we look at the data over 4 months we can get a clue as to the general direction of the change in the new home sales data. Referring back to the Commerce Department report, I found that from October through January (the four most-recent revised months) the seasonally-adjusted, annualized readings for new home sales were 673,000, 679,000, 685,000, and 709,000. Fitting a linear trend through this data revealed an average monthly growth rate of 11,400 over the period defined by the four points. This translates into a 20 percent annualized growth rate.

In other news, an updated figure for the University of Michigan's March Consumer Sentiment Index became available today. The revised number for the Index was 93.7, down 2 from the earlier estimate of 95.7, but up 5.2 from February's 88.5 reading. This dropped Merlin's March composite index (the average of the U of M and Conference Board numbers) from 96.7 to 95.7--still the highest reading for the last seven months.

Finally, today the Purchasing Management Association of Chicago released the results of its March member survey. Based on the survey, the association calculates an index of area economic activity. This index rose from 44.9 in February to 47.3 in March. But, any number less than 50 is judged to be indicative of negative growth in the manufacturing sector. The prices-paid index for the Chicago area dropped from 49.1 to 46.8--a sign of waning inflation, and the employment index sagged from 46.9 to 44.8--another indicator of slowing economic activity.

We'll get a nationwide overview of conditions in the manufacturing sector on Monday when the National Association of Purchasing Management releases the results of its March survey of member firms.

Byline: Lafferty (MF Merlin)