Storytelling In The News: #85

The gloomy story of the record US trade deficit

March 11, 2004

This morning's top business story is the record US trade deficit -- all time high of $43.1bn in January. When the story first emerged, US stocks "nosedived", with the Dow Jones and Nasdaq averages down 1.5% on the day, and triggering falls in Japanese and European shares. The Dow Jones Industrial Average had lost all its 2004 gains when US stock markets closed on Wednesday, having dropped 160 points to 10,296.8 during the day.

Exploring the gloomy news

As analysts looked for explanations of the bad news, they discovered negative elements in the current situation, a phenomenon which further accentuated a general gloomy mood.

According to the BBC, the record US trade deficit "dashed hopes" that the recent fall in the dollar would stimulate exports. The markets were perceived as "gloomy".

"To me this is very worrisome. The trade deficit is not improving. It is getting worse despite the dollar depreciation," said Wells Fargo Banks chief economist Sung Won Sohn.

In recent months the dollar has fallen sharply against major currencies which, in theory, should benefit the US trade balance in two ways. Firstly, it should make US exports cheaper and thus more competitive in overseas markets. Secondly, it should make imports more expensive, reducing demand for imported goods. This hasn't happened.

Is there a silver lining to the dark cloud?

Some analysts noted there were some one-off factors behind the worse-then-expected figures. Imported oil prices during January were at their highest level since March 2003, which led to a 10% rise in the US's petroleum deficit. Also, exports were hit by restrictions on meat exports following outbreaks of mad cow disease and bird flu.

Some analysts tried to see a possible bright side to the news by seeing the problem caused by other economies: "the new trade report revealed more about the economic weakness in Europe than about the inability of American companies to compete." Imports and exports declined in January, but exports fell more, leading to a 0.9 percent increase in the overall trade deficit, to $43.1 billion in January from $42.7 billion in December. "The real problem is that our trading partners are only beginning to recover, so U.S. export growth has really been flat," said James Glassman, a senior economist at J. P. Morgan Chase.

Bad news leads to more bad news

But overall, the mood was gloomy as economists told future stories of the negative impact of the deficit on other aspects of the economy.

Many economists saw the widening trade gap as at least partly responsible for the weakness of the American job market. The Labor Department reported last week that job creation came to a near standstill last month, and the economy has lost about 2.2 million jobs since January 2001.

In addition to the effect on jobs, the trade deficit has also led to a huge increase in overall United States indebtedness to the rest of the world. The nation's net foreign obligations, which include debt and the claim on American profits by foreign investors, are equal to more than one-quarter of total American output.

According to the New York Times, the deficit tied in with falling stock prices, as investors appear concerned that the economy's growth over the last year has come mainly as a result of short-term stimulus from the federal government and Federal Reserve, not because of increased corporate investment or sustainable increases in consumer spending.

The financial impact of cascading narratives of gloom

Thus the story of one piece of apparently bad news (the trade deficit) triggers efforts to explain the bad news, which leads to more gloomy news, which in turn causes investors and managers to expect worse to come and to be cautious in spending and hiring decisions, which in turn leads to real bad news - not just a story.

Read The New York Times

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