Exports fell a bit and imports jumped in July, prompting the usual trade deficit jitters. Yet while the widening gap might reflect a less than stellar trade picture, total trade—a better representation of economic health—gives a different view. Trade is growing at a healthy pace, and under the hood lie key indicators of economic strength—a nice tailwind for markets.
Sure, exports fell by $1.1 billion—not great. Looking at monthly data, it is easy to see why folks fret weakening trade—exports and imports seemingly leveled off around July 2011 (Exhibit 1). But quarterly data for the same time period paint a different picture (Exhibit 2). There, total trade has grown—not at a rip-roaring pace, but growth is growth. Monthly trade levels are struggling to break through all-time highs, but quarterly figures are well in record territory and still inching up—much more telling about the economy’s state. That is true of exports and imports.
Exhibit 1: Total Monthly Trade
Source: St. Louis Fed, as of 9/4/2013.
Exhibit 2: Total Quarterly Trade (Seasonally Adjusted Annual Rate)
Source: BEA, as of 8/29/2013.
That said, total trade could be more robust—import growth hasn’t matched export growth during this expansion. Ordinarily, that is cause for concern—rising imports mean rising demand. But in this case, flatter headline imports result from a positive development for the economy—and investors.
That would be the shale boom. Falling petroleum imports are the biggest detractor from the headline figure. Thanks to the development of the Eagle Ford, Bakken and other shale deposits, US oil production is higher than it has been in decades (Exhibit 3), reducing the need for imports (Exhibit 4). Excluding petroleum, imports are growing apace—demand is plenty healthy.
Exhibit 3: Monthly US Oil Production
Source: Energy Information Administration, as of 8/29/2013.
Exhibit 4: Petroleum Imports by Volume
Source: US Census Bureau, as of 9/4/2013.
This is a big positive for economic growth and corporate profitability. Hydraulic fracturing and other extraction methods have increased demand for more equipment and services, boosting growth in other areas. Increased oil and natural gas supply has lowered energy prices, a prime input cost for many US firms—a key reason why earnings are wrapping their 14th straight quarter of growth. Reduced energy costs are also enticing more companies to source more production in the US, further aiding growth.
Volatile headline trade data don’t tell you any of this. Investors who focus solely on the trade deficit, total exports or total imports will miss some big reasons to be bullish. That is largely why trade remains an underappreciated positive. Most folks just accept the lackluster headline monthly numbers at face value and don’t bother peeking under the hood to find the real story. At some point, these folks will realize how strong fundamentals are, and they’ll bid prices up. Investors who look deeper and gain a better understanding of what’s driving economic growth and corporate profitability thus have a leg up—they get in the game earlier and get a lift as sentiment improves.