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By Robert Johnson, CFA and Jeremy Glaser | 02-08-2017 11:00 AM

Trade Biggest Question Mark for GDP

Morningstar's Bob Johnson says a decline in imports for 2016 is very unusual given the strong dollar, but a couple of issues might be holding them back.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Our director of economic analysis, Bob Johnson, thinks that one of the biggest question marks in 2017 is what trade is going to look like. We're going to look at some trade deficit data today.

Bob, thanks for joining me.

Bob Johnson: Great to be here.

Glaser: So, we just got December's trade deficit and also all of 2016. Looking at those December numbers, anything stand out to you in terms of trade?

Johnson: Well, I think the interesting thing was in the month of December we saw exports up about 2.7% and imports were up a little less at 1.8%. So, we saw some improvement month to month in the trade deficit, which is good, because net trade has been hurting us recently in the GDP calculation.

Glaser: This gets a little bit counterintuitive though. You would think that a strong dollar would really be hurting exports, more expensive for people outside the U.S. to buy goods made here. What do you think is driving those export numbers higher then?

Johnson: I think we got to be careful there not to look at just one month. But even let's step back and look at the broader context of all of 2016. And there what we saw was exports were down about 2.3%, which is not surprising given the stronger dollar, but what is surprising that imports were almost down as much at 1.8%. That's a very unusual state of affairs. Usually, when the U.S. economy is doing relatively well compared to the rest of the world and your currency is stronger, what usually happens is imports go through the roof. And that just didn't happen this time.

Glaser: What do you think is holding them back?

Johnson: There's a number of specialty things going on, and it's interesting this is happening when trade is becoming such a big issue. It's just about the time that imports seem to be coming under control for some reason or another. In fact, in the case of China, imports in the full year 2016 were down about 5%, although China still accounts for about 70% of our trade deficit. Yes, that's 70% from just one country. But nevertheless, that number was down in the full year 2016.

Now, in terms of reasons and what's going on, certainly, one of them is that as businesses set up their supply chains, it's hard to move them around. You don't suddenly drop from one country to another just because the price is changed a nickel or whatever. And so, that's certainly part of the issue is that it takes a little time for people to shift if they were to shift because so many things are interrelated and businesses can hedge a little bit. So, maybe it doesn't show up entirely in the data or in their results because they've hedged it out.

Now, the other thing that's interesting is that consumer preference may be behind part of what's going on. And for most of the year, consumer imports were particularly weak, which is unusual. That's usually the part of the deficit that really balloons and where we have a lot of imports. And I think it's because if you were spending less on clothes and less on some of the material goods and more on services such as healthcare and travel and that tends to shift things more toward the U.S. and away from imports.

Glaser: So, it could be that the woes that a lot of the department stores that we've been talking about are having a big impact on trade?

Johnson: Absolutely.

Glaser: So, let's look into 2017. What's on your radar in terms of what's happening with trade? What kind of impact do you think it will have on GDP?

Johnson: Well, the trend has been that exports have slowed, but again, a little bit less than I might have guessed given the move in the dollar and maybe exports will see a little bit more impact as we move into 2017 because it is a delayed effect. You just don't shift things overnight and maybe the other shoe is to fall there on exports because certainly a 2% decline doesn't necessarily seem huge given all that's been going on. And the imports will also be a key question. If we legislate a tariff or if we change trade policy or change tax policy relative to imports and exports, those could all swing the numbers relatively quickly. And we're concerned about that, and we don't know the answers to that. So, it's a wide-open question for 2017.

Now, we had been thinking that it hurt us in the full year last year, in 2016, and we're thinking, well, maybe the dollar stabilizes a little bit, maybe it gets talked down a little bit, maybe at least the number stabilizes. It didn't do as much damage as it did in, say, 2016. But we fear that if any of these new trade policies get adopted that it's certainly going to have an impact there, but we don't know what and we don't know when.

Glaser: Bob, thanks for your take on trade today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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