Sunday, May 11, 2008

economic bright spot or light from an oncoming train?

Saturday morning’s Watertown Daily Times (WDT, p. A6) had an AP news story: “Trade deficit drops during March” with the WDT adding the upbeat subheading, “ECONOMIC BRIGHT SPOT: Demand for imports falls by bigger-than-expected amount.”

Now maybe the trade deficit (exports less imports) is getting smaller due to the weaker dollar, the falling dollar. This makes imports more expensive and they should fall. Not bad since a weaker, cheaper dollar also makes U.S. products cheaper to foreigners. U.S. exports will increase, increasing spending in the U.S. This is good for the economy. Some think strong export spending has been keeping, and could continue to keep, the U.S.A. out of a full-blown recession.

Now most people think that deficits are bad. Therefore a smaller deficit is a good thing. The word deficit has a negative connotation. It really does not matter what kind of deficit we’re talking about, a deficit, any deficit, seems bad.

With a weaker dollar a falling trade deficit is, for most people, a good thing.

However in this case, at this point in time, a falling trade deficit is very, very bad news.

To quote the article,

The smaller deficit was driven by a 2.9 percent drop in imports, which reflected widespread weakness in demand as consumers, battered by a severe housing slump, a credit crisis and soaring gasoline prices, cut back on their purchases of both domestic goods and imports.

Thus, the reason the demand for imports fell was not so much due to a weaker dollar, but because of deteriorating business conditions in the U.S.A. U.S. spending is down, U.S. production is down, therefore U.S. spending on imports is also down. This may indicate a U.S. RECESSION.

The article also noted that this “…marked the biggest one-month decline in imports since December 2001, when the country was struggling to emerge from the last recession.” November-December 2001 was when the last recession ended. The end of a recession does not mean that bad times are over. The end of the recession means the economy has hit bottom. The end of a recession is a good news, bad news sort of thing. Good news: The economy is not getting worse. Bad News: The economy is at its worst.

To compare the current economic situation with the last time the economy hit bottom is, to say the least, not very comforting.

I also found even more disturbing information buried in the article. The trade deficit improved not just because imports fell, but because imports fell by more than exports fell. Falling exports mean falling spending on U.S. products. Falling spending on U.S. products may mean falling U.S. incomes, falling U.S. production, and falling U.S. employment. This may indicate a U.S. RECESSION. Falling spending from abroad may mean a world-wide recession. This is not good for anyone.

There is absolutely nothing good about this news.

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