TRADE DEFICIT
Falling oil prices help
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The nation’s trade deficit is greeted with yawns by most Americans, even as they hear that it threatens tomorrow’s prosperity.
The chorus declaring its dangers includes foreign leaders, some of whom are suspect because they have been eager to voice numerous other criticisms of America and its policies.
Yet recent reports show that the trade gap has hit a record pace, topping $630 billion annually, while the monthly shortfall is north of $60 billion. A torrent of goods continues to flow in from China and Japan, which buy items sparingly from this country.
Economist Sung Won Sohn is looking for Thursday’s report on trade for December to show the gap narrowing to $56 billion from $60.3 billion a month earlier, thanks largely to lower petroleum prices.
“Oil prices fell back significantly around the holidays, and the effect was quite favorable,” said Sohn, of Hanmi Bank in Los Angeles. He expects energy prices to continue to sink.
There was a jump of about 2.5 percent in American exports during the month, a sign of things to come, Sohn said.
“The decline of the dollar is creating bargains overseas, and the world is responding,” he said. “We expect exports to grow by 1 to 2 percent during every month of the first half of this year.”
A third factor helping the trade gap is foreign tourism, as Europeans flock to our shores, Sohn said.
“They think they are in heaven when they land in this country,” he said.
Overall, the trend will be for the trade deficit to narrow, Sohn added, and that may lower the decibel level of some of the critics.
FEDERAL RESERVE
Gauging growth abroad
The Federal Reserve’s campaign to tighten credit has resulted in a half-dozen interest rate increases, the most recent of which took place Wednesday. At this point, the short-term target has risen to 2.5 percent, and some analysts believe it is time for the central bank to back off for a while.
Chicago economist William Hummer, however, sees no end in sight for the tightening effort, at least until early summer.
“The Fed’s statement following the most recent increase offered no hint that they have completed their moves,” said Hummer, of Wayne Hummer Investments.
Looking ahead, he believes the central bank is on alert for signs that overseas economies might slow. In particular, there is concern about Germany, where joblessness has leaped to the highest level in more than a half-century.
“But unless something traumatic happens, the Fed will remain on course,” Hummer said. “The goal is to push rates toward neutrality, and that means that rates will go several notches higher than current levels.”
Get ready for Monday’s report on December consumer credit to show a modest gain, as holiday spending created another surge in credit card activity. Looking forward, economists expect borrowing to slow a bit in 2005, particularly as the Fed’s tightening campaign crimps zero-percent auto loans.
EQUITIES
Positive on profits
The year has been off to a so-so start for the stock market, which fell by 3 percent to 5 percent during January. Yet corporate profits have been growing at a rate of 16 percent-plus, year over year, based on fourth-quarter results.
Flossmoor-based investment manager Richard Evans says the number of positive earnings surprises substantially outweighs the disappointments, so investors should look to the upside.
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“We think the January decline is going to pave the way for a potential 25 percent market advance this year,” Evans told clients in his Renaissance Report newsletter. “The decline will act as a springboard for the resumption of the bull market.”