Trade deficit hits two-year low

The week's economic releases were decidedly positive. The top story was the continuing reduction of the U.S. trade deficit, which fell for the fourth straight month in September and reached its lowest level since May 2005. Meanwhile, nonfarm productivity grew at the fastest pace in more than four years and activity in the services sector improved in October. For the week, the S&P 500 Index fell 3.7% to 1,454 (for a year-to-date total return of 4.1%). The yield of the 10-year U.S. Treasury note fell 7 basis points, to 4.22%

 

Trade deficit narrowed again in September

The U.S. balance of trade—the gap between the total value of imports and exports—shrank to $56.5 billion in September from a downwardly revised $56.8 billion in August. This was in contrast to expectations of an increase to $58.2 billion and marked the fourth consecutive month of improvement. Exports increased $1.5 billion, while imports grew $1.2 billion. The U.S. dollar's ongoing weakness is playing a significant role in the deficit reduction, because it makes American goods and services more competitive abroad. Compared with a year ago, the trade deficit is down 12%.

 

Nonfarm productivity rose sharply in third quarter; labor costs fell

U.S. nonfarm productivity jumped at a 4.9% annualized rate in the third quarter, according to preliminary data from the Labor Department. This gain—well above consensus expectations of a 3.3% increase—marked the fastest pace in over four years and was more than double the second quarter's 2.2% rate of growth. Meanwhile, unit labor costs, a key inflationary gauge, fell an annualized 0.2% in the third quarter, in sharp contrast to an anticipated gain of 0.8%. It was the first decline in labor costs since the summer of 2006. Compared with year-ago levels, productivity was up 2.4% and unit labor costs were 4.3% higher.

 

Services sector bounced back in October

In contrast to last week's disappointing report on October activity in the manufacturing sector, the Institute for Supply Management's gauge of activity in the services sector surpassed analysts' expectations of a decrease by posting a modest increase in October, from 54.8 to 55.8. Forward-looking indicators, particularly new and backlogged orders , seemed to suggest that the improvement may continue in coming months. The employment component of the index weakened a bit. Despite the overall positive tenor of the report, sentiment among survey respondents remained mixed about the future strength of business conditions. Also, the index remained below its 12-month average.

 

September consumer credit increase smaller than expected

American consumers seemed less reluctant to use credit for their purchases in September, as outstanding consumer credit increased $3.7 billion, or an annualized 1.8%. Revolving debt, primarily credit card debt, grew at an annualized 4.4%. It was the smallest change since April. Continued slowness in auto sales led to a tame 0.3% annualized increase in nonrevolving debt, of which auto loans are the dominant component. On a year-over-year basis, total credit usage grew a modest 5.1%.

 

The economic week ahead

Investors will get closer readings on inflation at the wholesale and consumer levels from Wednesday's Producer Price Index and Thursday's Consumer Price Index. Other expected reports include updates on retail sales and business inventories (Wednesday) and industrial production (Friday).