Morgan Stanley Found Two Red Flags In This Week's Trade Report, And Now Its Forecast For Next Quarter Is Not Pretty

In his latest weekly Macro Dashboard note, Morgan Stanley chief economist Vincent Reinhart looks into Thursday’s trade deficit report, and discovers bad news on two fronts.

First, exports are slowing. This is bad for GDP. Second, capital goods imports fell, which is red flag that companies are hitting the breaks on investment, possibly ahead of the fiscal cliff.

Here’s Reinhart:

A soft international trade report showed increasing weakness in the two key areas that have turned into growing drags as the economy has slowed over the course of this year, exports and capital spending, the former hit by increasingly soft global growth and the latter increasingly depressed by fiscal cliff uncertainty.  The trade report was weak, pointing to a bigger drag on third quarter growth from net exports and investment.  The trade deficit widened to $44.2 billion in August from $42.5 billion in July, with exports falling 1.0% and imports 0.1% even with a boost from higher commodity prices.  In real terms, good exports fell 2.6% on top of a 2.3% decline in July, and goods imports fell 0.9%.  And although overall exports tumbled in August, capital goods exports rose, while capital goods imports declined, which means that domestic demand for equipment was even weaker than initially indicated by the drop in capital goods shipments in the durable goods report.

This point about slowing capital good spending by domestic companies is something more folks are talking about.

At The Big Picture conference this week, David Rosenberg said that the year-over-year decline in the 3-month moving average of core CAPEX orders was one of his big red flags.

Core capex orders

Photo: Bloomberg, Business Insider

So what does this all mean for Q4 GDP?

Here’s Morgan Stanley’s Vincent Reinhart again, delivering the bad news:

Incorporating the results of the trade report, we forecast a 3% decline in exports in Q3 and a 0.3pp subtraction from net exports.  And we see equipment and software investment falling 3% and overall business investment 5%.  These would be the weakest results for exports and investment since the first half of 2009 when the economy was still in recession.  These downgrades cut our Q3 GDP estimate to +1.5% from +2.1%, of which inventory accumulation is expected to account for 0.9pp.  The business inventories report on Monday will likely show a further rise in the combined retail, wholesale, and manufacturing inventory/sales ratio to the highest level since late 2009, raising risks of a cutback in inventories weighing on growth in Q4. 

So yeah, a weak world, and a domestic investment slowdown. Not good.

For more gloom, see David Rosenberg’s presentation on Navigating The New Normal >

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