April 10, 2009

Economic Outlook: Watching the gap

Stock markets in Asia and Europe posted gains Friday following an outburst of optimism in U.S. markets sparked by Wells Fargo & Co.

The San Francisco bank said its purchase of Wachovia Corp. had put a 40 percent bonus into its revenue stream and that it expected to announce a record $3 billion profit for the first quarter. On Thursday, financial firms lead the charge to higher numbers, with Citigroup Inc., Wells Fargo, and Bank of America showing gains of 10.74 percent, 26.34 percent and 34.99 percent, respectively.

The Dow Jones industrial average, after surging 22.4 percent in March, its best month in 70 years, gained 246.27 points, or 3.14 percent, to 8,083.3. The Standard & Poor's 500 held above 800, reaching 856.56 by the day's close.

While corporate numbers suddenly seemed promising, doubts about the broader economy continued to clutter the landscape. The U.S. Federal Reserve Wednesday released minutes of its March meeting -- the meeting that ended with a $300 billion quantitative easing program and an additional $750 billion pumped into the mortgage market.

The Fed's narrative was not bursting with optimism. The Fed said unemployment would likely rise. Industrial production looked weak. The credit situation still needed work, the Fed said, expecting a recovery would take longer than previously anticipated.

Trade numbers released Thursday pointed to a global downturn. With both imports and exports down, the trade gap shrank for the fifth consecutive month, falling to $26 billion. But that just meant everyone was pickled, analysts said.

The U.S. heartland, the country's farming and manufacturing base, could soon show evidence of the export decline beyond the slump in automobiles, The New York Times reported Friday.

The tables have turned from a year ago, when commodity prices were soaring and U.S. corn and wheat were feeding livestock and people around the world. The U.S. Department of Agriculture predicted farm exports -- about 20 percent of the value of the U.S. production -- would fall from $117 billion in 2008 to $96 billion this year, the Times said.

The predicted decline is enough to close out 45,000 U.S. jobs and lead to a drop in prices for arable land. Farmers are already leaving some fields fallow, the USDA said.

The trade gap, at 2.6 percent of the gross domestic product, indicates Americans spend much more abroad than foreigners spend in the United States, consume too much more than they produce and borrow too much from the rest of the world, especially China and the Middle East oil exporters, Peter Morici, former chief economist at the U.S. International Trade Commission wrote this week.

The U.S. retailer sector, where economists can survey the trade gap up close and personal, showed a 2.1 percent decline in March compared to a year ago.

As financial firms find their footing, there's a migration of weakness, Nicholas Bohnsack, a retail strategist at Strategas Research Partners, told the Times.

What you're now seeing is the non-financial segment really start to tail off, he said.