Interview: Chief Economist with Moody's Investor Service
>> u.s. trade deficit widened in june. also today the university of michigan said the index of consumer sentiment fell in august from the highest level of the year. coming as americans faced record gas prices. a lot to put in perspective. key news out as well next week. we welcome john lonski, chief economist with moody’s investor service. hi, john.
>> hello.
>> a lot to absorb this week with the record energy prices. you have consumer sentiment falling from the highest of the year. you have the trade deficit very key. when you look back on the week before we look ahead to next week, what stands out? it was also the fed meeting this week. what is the key take away about the state of the economy as we wind up this week?
>> well, we see from the numbers on retail sales that were very strong even without a jump in gasoline station sales as well as a jump in auto sales, together with the widening of the trade deficit. domestic spend something growing rapidly, perhaps too rapidly to last much longer. afterall, we do find on a year over year basis that retail sales is approaching 10% annually. that’s well above disposable personal income growth of roughly 5%. consumer spending will slow but it’s not necessarily going to drop off a cliff according to the continued decline by initial state jobless claims. we ought to generate enough in terms of employment opportunities so that income can sustain. retail sales growth is something no lower than 16%. it’s oil prices. that’s the big risk factor looking at second half of this year.
>> so, john, does the school shopping season become very key because you have people getting ready to do back to school shopping when it is costing them well over record level per gallon to fill a gas tank?
>> that will be true. we’ll pay attention to that. we’ll be very interested as to what becomes of motor vehicle sales after these sales incentive programs soon expire.
>> what about inflation? we have the consumer price index as well as the producer price index. both due out next week. what is your take on the inflation situation?
>> we think that headline inflation will top expectations, perhaps the c.p.i. rises by .7% for the month of july. core inflation, however, should remain well contained for now. looking ahead, however, chances are that companies will increasingly begin to pass on part of the increase in energy costs as well as higher costs for other industrial commodities to final product prices. don’t mistakenly believe that core inflation has bottomed. it is bound to move higher.
>> it’s interesting. i know it is hard to talk about technology because technology prices often move lower. with dell, with the shortfall in terms of the sales forecast, it’s because the company is not -- has to do with pricing, aggressive pricing to attract consumers. do you think we’ll hear that from companies outside of technology?
>> i don’t think so. we have to realize that one of the factors that put downward pressure on dell’s p.c. prices was sluggishness of the first half of this year. we did have a buildup of inventories relative to sales in the first half. now that has been corrected. we again have business sales rising more rapidly than inventories so that should lend support to product prices. we’re beginning to see a pickup in spending in countries such as china. today’s trade report, as ugly as the widening of the trade deficit with china was, the fact of the matter is after being relatively flat to lower, the final quarter of last year and first quarter of this year and second quarter, u.s. exports to china grew by 20% year over year.
>> i aou think that will continue to be a driver of economic growth?
>> that’s going to be a benefit to the u.s. economy. but then again i don’t think that the trade deficit is about to narrow substantially any time soon. in large part because the u.s. grows more rapidly than the rest of the world and also because unfortunately we’ll probably look at relatively high, if not higher, oil prices into the near term.
>> john, i want to tie it into the treasury market because one thing that was very interesting this week is you had the first weekly gains since june. yields moving lower. 10-year at 4.24%. very briefly based on what you said about inflation, what do you think we can expect to happen in the treasury market next week?
>> well, obviously the treasury market believes that inflation is well contained. we have that 10-year treasury yield come down from 4.4% to nearly 4.2%. that has to be good news for the u.s. economy. that’s going to continue to let buoyancy to the still vibrant housing market . you know, if we are ever going to suffer economically speaking in the united states from a wide trade deficit despite addition to the immediate loss of jobs because of increased imports, it has to be because foreigners get so tired of financing our trade deficit that they cut back on buying of treasuries. that drives u.s. borrowing costs sharply higher. that simply is not happening to any degree.
>> john, have a great weekend. thank you for joining us.
>> thank you.
>> john lonski of moody’s investor service. the national hockey league may make a major change this season. coming up, “money & sports.”
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>> welcome back to “after the bell.” 30 after the hour. i’m ellen braitman. let’s recap the day on wall street where stocks fell. a disappointing sales forecast from dell. that dragged technology shares lower. oil prices climbing to a record $67 a barrel. also there were some economic reports out also that were disappointing investors. several factors at play. coming out after the bell we have headlines crossing from maytag. it is declaring the pwheurl pool proposal superior. it is changing its recommendation. maytag is postponing a special meeting. maytag’s board is recommending voting against the triton deal. that for a private equity group to take over maytag. whirlpool has made several higher offers trying to beat the bid and have maytag accept its offer. maytag’s board is giving notice to triteon of the determination recommending voting against the deal. the story coming out after the close where maytag is declaring the whirlpool proposal superior. more details after the close today in this ongoing saga with two competing bids trying to take over the appliance maker maytag. more details as they become developing. in the meantime, we turn back to the stock market because while second quarter earnings have essentially been reported by many companies, we do have three dow members reporting next week. let’s get details from deborah kostroun.
>> thanks a lot, ellen. second quarter earnings seems like they’re over. but next week we do get earnings from wal-mart. of course, that’s the world’s largest retailer. we get wal-mart’s earnings before the market opens on tuesday. home depot releases earnings before the open on tuesday as well. hewlett-packard releases earnings on tuesday as well after the close. so a lot of earnings coming out. also next week we have housing starts, building permits and also the p.p.i. coming out. we do have other economic news as well. as we’re getting back to some earnings, dreamworks animation, producer of shrek movies, posted a smaller second quarter loss than it forecast a month ago as revenue from the library of older films helped ease a slump in sales of their new videos. remember, they have been very disappointing sales of “shrek 2.” technology falling, kind of a dell hangover after third quarter sales come in disappointing. oil near $67 a barrel. that also really did not help out stocks today. economic reports we got in today’s session, a disappointing trade deficit that came out wider than expected. consumer confers declining. certainly did not add up very good for the market . if you take a look at the dow laggards in the session, mcdonald’s at top of the list. this following yesterday’s biggest advance in five years and today we saw one of the biggest drops since december of 2003. yesterday mcdonald’s rallied on speculation that a reality trust may buy a stake in the company. according to an analyst at cibc world markets saying that scenario is very unlikely because selling its real estate would jeopardize their franchise relationship. mcdonald’s on the down side.
>> thank you so much. and in economic news, today’s wider than expected trade deficit came at a time of strong economic growth in the u.s. what is the historic relationship between the trade deficit and g.d.p. and it there hope the trade deficit will narrow? that’s the subject of “chart of the day.” here with a closer look is editor-at-large tom keene. what are we looking at specifically in terms of the relationship?
>> it’s like productivity, there’s a lot of moving parts here. the moving part is yes, the deficit is worse than we saw that today moving from roughly $55 billion up to $58 billion or $59 billion. many economists suggesting $104 billion. at the same time, the economy is growing. the trade balance makes up part of the g.d.p. calculation. you take the trade balance and divide it by the g.d.p. and you get a real interesting relationship. here it is on the chart. the green line smoothes out monthly tkatsa. a three-month month moving average going back to 1992. the red line he is 10 years of the relationship. this is a trade balance as a percent of g.d.p..
>> we are seeing --
>> worst relationship. what is great is the persistence a relentless move higher. we have gone flat here. the green line there suggesting the recent months, really eight, nine, 10 months of flattens as the trade balance grows, the deficit grows, rather, and g.d.p. grows as well. a lot of economist saying that will change soon.
>> let’s talk about the components of it. today’s report showed that exports did rise. in terms of the factors to improving the trade balance, is it more exports or considered to be fewer imports?
>> economists look at both. what is fascinating is the politics of t.secretary snow always leads with a need of growing exports, growing u.s. exports and mentions that difficult if you have a weak europe and weak japan. remember from the chart yesterday how big japan and europe is relative to china. there’s a group that says they want greater exports. there’s another group that says imports somehow have to diminish if it is a lower oil price making up a big part of imports or it’s just macroeconomics of national savings that start to bring down that. or it could be the currency that could change that. there’s a lot going on here both in import growth and export growth which is not there.
>> we’ll take a break. we’ll continue this conversation. we look at economy because after the break we’ll be joined by john lonski of moody’s investor service. we talk about the trade balance with him and also look to next week. we have key inflation data that is due out after the weekend. we look forward to that and speak with john in a few moments’ time.
