Data Paint Worse-Than-Expected Economic Picture

By: Anna Willard

Americans bought foreign goods in December rather than stimulating domestic output, wholesale inflation surged last month and manufacturing suffered in February, a surprisingly poor set of economic reports showed on Thursday.

Separate data revealed a labor market still stuck in the doldrums, with the number of Americans lining up to claim first-time unemployment benefits jumping in the latest week.

"Higher inflation, weaker growth numbers - overall it was not a good combination for the economy", said Henry Willmore, chief U.S. economist at Barclays Capital in New York. "The claims numbers were disappointing as well."

The stock market closed lower, partly because of the gloomy data. The Down Jones industrial average fell 85 points to 7,914. The U.S. dollar also tumbled, hitting a three-week low against the yen. U.S. Treasury securities prices rose with the data, helping to push benchmark 10-year note yields close to their lows of the year.

The U.S. trade gap widened 10.6% to a record $44.2 billion in December as exports floundered and imports surged. The gap trounced expectations for a deficit of $38.8 billion.

"Welcome to the Grand Canyon of trade deficits. The sharp widening... was surprising and somewhat discouraging", said Joel Naroff, chief economist at Naroff Economic Advisors. "While we continue to buy everything that can be moved from the rest of the world, our trading partners are not reciprocating."

The trade gap with Germany set a record and the gulf with Japan was the highest since October 2000. Imports from China, the largest U.S. import partner, surged to $125.2 billion.

The numbers came as U.S. Treasury Secretary John Snow acknowledged that uncertainty over Iraq is keeping economic activity subdued. "There's no doubt... the uncertainties about Iraq create uncertainty about the economy, and it's having a negative impact on equity markets and restraining business leaders from making capital expenditures", Snow said in London.

Manufacturing Suffering

America's appetite for foreign goods, whetted by the relatively strong dollar, has left domestic manufacturers struggling even with the recent dip in the currency's value.

"There can be no question that U.S. manufacturing trade competitiveness continues to slip", said Jerry Jasinowski, president of the National Association of Manufacturers. Manufacturing in the U.S. mid-Atlantic region slowed sharply in February, a survey out on Thursday showed. The Federal Reserve Bank of Philadelphia said its index of business conditions fell to 2.3 in February from 11.2 in January. The reading was weaker than analysts' expectations of a dip to 10.3, although it still pointed to an expanding regional manufacturing sector. A reading above zero indicates growth.

Economists said the trade data mean the government may revise up fourth-quarter gross domestic product by less than is now expected. According to preliminary data, the economy grew at a pace of 0.7% in the last quarter of 2002. Before the latest numbers, economists had expected it to be revised up next week to 1.1%. "The trade number has implications for GDP", said Willmore. "It is still going to get revised up but much less."

Inflation On the Rise

There was also worrying news on the inflation front. The Labor Department said producer prices soared 1.6%, the biggest leap since January 1990 and far higher than the 0.5% increase expected by economists.

Much of the rise was linked to rocketing costs for gasoline and heating oil as cold weather boosted demand and uncertainty over a possible war with Iraq pushed up prices. Excluding volatile food and energy prices, though, inflation still rose an unexpectedly large 0.9%. Auto costs factored into that increase, after manufacturers cut back on incentives in January after a bumper sales month in December fueled by attractive pricing and financing offers.

But there were price rises outside the autos and energy sectors, including in pharmaceuticals and capital equipment.

The report may come as a surprise to Federal Reserve officials. Fed Chairman Alan Greenspan said last week there is little sign of inflation in the economy. However, some economists played down the data, saying not too much should be made of one month's numbers and pointing out the report may actually soothe fears about deflation. "I told our folks on the trading floor not to blow a gasket on the PPI number", said Mark Vitner, senior economist at Wachovia Securities.

For a more complete picture of inflation, financial markets will look to Friday's report on consumer prices. Analysts expect the Consumer Price Index to rise by 0.3% overall, or 0.2% without food and energy.

In disappointing news from the job front, the Labor Department said initial claims for unemployment aid rose 21,000 to a seasonally adjusted 402,000 in the week ended Feb. 15.

The number was worse than the 382,000 expected by economists, many of whom view claims above the 400,000 level as a sign of a deteriorating jobs market. "The weakness in the economy is reflected in the jobless claims numbers, which show we have still very little traction in employment growth and unlikely to see any in the near future", said Tim O'Neill, chief economist of the BMO Financial Group.

Record low 30- and 15-year mortgage rates reported for this week offered one small bright spot for the economy. Low rates have helped housing and, through heavy mortgage refinancing, helped boost consumer spending.