Dubious Document : Trade Gap Panic: Does It Add Up?

The U.S. trade deficit report, once barely noticed amid the government’s mountain of routine releases, has recently taken on harrowing significance, setting off dizzying slides in the financial markets by its monthly reminder that Americans purchase vastly more from the rest of the world than they are able to sell.

In light of Wall Street’s current turbulence, analysts and investors are now bracing themselves for the next report, scheduled for this Friday. If the numbers do not reflect a real narrowing of the U.S. trade gap, they warn, the markets may be battered by a panicky wave of sell-offs once again.

Since late last year, this once-ignored set of trade statistics has built up a track record of financial carnage, slashing values of stocks, bonds and the dollar internationally.

Sent Stocks Tumbling

A report released by the Commerce Department on Oct. 16 sent the stock market tumbling 108 points and helped set the stage for the historic 508-point crash three days later. Another one in December sent the dollar’s value hurtling to lows on currency markets not seen since World War II. Rumors last week that the trade imbalance would soar in the coming report contributed to the stock market’s loss of 140 points last Friday.

Yet there is an irony. While the monthly U.S. trade report electrifies investors throughout the world, it is a dubious document for several reasons.

“It’s probably the least statistically reliable number that the government puts out,” said Irwin L. Kellner, chief economist at Manufacturers Hanover Trust Co. in New York. “But that’s the game the markets are playing, and there’s no point in saying it should be ignored--because it’s not going to be.”

Quirky things, such as the arrival here of a few extra oil tankers one month, or a minor hold-up in a sale abroad of U.S.-made jetliners, routinely skew the findings. Many transactions are not reported promptly, which can throw off a month’s statistics by hundreds of millions of dollars--or more.

Paper Work Shortcuts

Faced with evidence from Canada that American truckers were taking shortcuts on paper work as they crossed the border, U.S. officials belatedly increased the 1986 U.S. export figure by $10 billion. In the past, Commerce Department officials sometimes announced that figures they had published previously were wrong by as much as 40%. In mid-1987 they began waiting an extra 10 days to sift the data and now claim that their numbers are no more than 5% off.

There are other weaknesses: Widely increasing prices of imports have aggravated the imbalance, obscuring the fact that Americans’ import purchases are slowing and overshadowing progress in U.S. exports.

For all its imperfections, however, the merchandise trade report highlights a very unpleasant reality about the United States: This country, a source of financing to debtor nations for much of the 20th Century, has sunk into debt itself. And it is having trouble getting out.

The trade deficit represents dollars flowing overseas, dollars that come back as foreign investments in U.S. Treasury bonds, for example. And Americans owe interest on those investments--which means that the foreign debt grows further.

“The reason the markets react to it is that, despite its relative inaccuracy, it’s a constant monthly reminder that we don’t have our house in order,” observed Jeffrey J. Schott, a research analyst with the Institute for International Economics in Washington.

David L. Horner, a currency analyst with the securities firm of Merrill Lynch, Pierce, Fenner & Smith in New York, put it this way: “While any one (monthly) number may be unreliable, when you put three or four together, you get a good notion of the central tendency of the trade deficit.”

Last month’s finding of a record-breaking $17.63-billion trade imbalance for October suggested that the tendency was clearly in the wrong direction. The gloomy report, which severely eroded the dollar’s value against the Japanese yen and West German mark, may have been skewed by special factors, such as strong demand in this country for imported holiday gifts, however.

Big Guessing Game

Right now, the biggest guessing game in the financial world is what Friday’s report for the month of November will show.

Many analysts and investors, still hopeful that stronger U.S. export performance is shrinking the trade gap, project a November imbalance in the range of $14 billion to $15 billion. One wild card: Whether consumers in November, the first full month after the stock market crash, cut back significantly on purchases of imports. This would reduce the deficit.

The guessing game has its perils. If the report fails to meet investors’ expectations, it will send a chill through the marketplace. “If we get a number of $17 billion, that would be a disaster for the dollar and other financial markets,” warned Allen Sinai, an economist with Shearson Lehman Bros. in New York.

Kellner was even more pessimistic: “If the number comes in at 15 1/2 or 16--which I wouldn’t rule out--the dollar’s going to take a pounding.”

Despite the fears, the U.S. trade picture is not without glimmers of hope. Nor is there any agreement among economists that short-term trade performance is the best barometer of the economy’s health. The fixation on trade is just the latest statistic to capture the imagination of professional traders. A few years ago, for example, investors’ dreams and nightmares focused on changes in the money supply.

In fact, the falling dollar has enabled U.S. companies to charge much less for their products overseas, allowing them to undercut many foreign competitors for the first time in years. For example, U.S. exports rose at an 8.2% annual rate between the second quarter of 1987 and the third quarter, according to the Commerce Department. Imports, which amount to almost twice as big an item in dollar terms as exports, also increased over that period, but at a slower 5.5% rate.

Import Prices Up

What complicates matters is that the falling dollar has forced up import prices. This means that while Americans may be buying a smaller share of things from abroad, they are paying more for those items they do buy. And that makes progress on the monthly deficit hard to achieve, despite the new vigor among U.S. manufacturers.

The trade picture looks somewhat better when analysts focus on what they call “volume”--the actual movement of products back and forth, in an attempt to screen out price changes that do not tell the whole story. From this perspective, Commerce Department officials say, the trade imbalance actually peaked in mid-1986, and improved steadily for about a year before regressing slightly between July and September of 1987.

Nonetheless, those who seek to interpret the numbers are well advised to use caution. Consider the tale of the Japanese gold purchases. In 1986, Japan needed more than 200 tons of the precious metal for a special coin it was minting to celebrate the 60th year of Emperor Hirohito’s reign.

Sent to U.S.

The Japanese, who reportedly bought the gold in various world markets, routed much of it into the United States over a period of months, letting it accumulate here. Yet they took most of it out of this country in just a single month. The effect? At a time of rising protectionist sentiment in the United States, the unusual shipments shrank the U.S. trade deficit with Japan from $5 billion in May of 1986 to $3.8 billion in June. And it turned what would have been a politically sensitive decline in U.S. exports in June into a gain, according to accounts.

Yet these seeming gains were illusory. Indeed, the Japanese may have thought the ploy would be less obvious out of an expectation that the U.S. trade deficit would genuinely shrink in the months ahead.

“They (the Japanese) chose to import the gold from the United States and make the trade deficit appear smaller than it otherwise would have,” recalled Dale W. Larson, an economist with the Bank of America in San Francisco. “Of course, they thought that by the summer of 1987 the trade deficit would be looking much better. Unfortunately, it wasn’t.”