Trade Deficit Shrinks as US Exports Set Record for 10th Consecutive Month, Jobless Claims Fall

- The Trade Deficit for December shrank to -$58.8 billion versus estimates of -$61.5 billion and -$63.1 billion in November.

- Initial Jobless Claims for this week fell to 348K versus estimates of 347K and 357K the prior week.

- Continuing Claims fell to 2761K versus estimates of 2759K and 2770K prior.

BOTTOM LINE: The US trade deficit narrowed more than forecast in December as exports surged to another record, Bloomberg reported. The gap between imports and exports shrank 6.9% in December, the most in more than a year. As well, the trade deficit for all of 2007 fell 6.2%, the largest decline since 1991. Exports rose 1.5% in December, setting a record for a 10^th consecutive month and reflecting strong demand for US-made capital equipment and industrial goods. For the year, exports soared 12% to a record $1.622 trillion. Imports in December fell 1.1%, led by a 14% decline in purchases from China, which helped shrink the month’s trade gap with China by 22%. Petroleum imports rose 4.2% to a record $36 billion. For all of last year, trade contributed .55 percentage point to GDP growth, the most since 1991. A better-than-expected trade deficit and inventory rebuilding in December should lead to an upward revision to 4Q GDP. I expect the US trade deficit to continue to improve over the intermediate-term.

The number of Americans filing first-time claims for unemployment benefits fell for a second week, Bloomberg reported. The four-week moving average of claims rose to 347,250 from 335,350. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, remained steady at a historically low 2.1%. Fed fund futures now imply an 80.0% chance for another 50 basis point rate cut at the March 18 meeting and a 20.0% chance for a 75 basis point rate cut. Fed Chairman Bernanke said today that the Fed will act in a “timely manner” to help growth. He also said price expectations are “reasonably well anchored” and that he sees stronger growth “starting later this year.” Finally, he said if housing improves, some bank writedowns will reverse. Treasury Secretary Hank Paulson said tax rebate payments will start in early May and that the Treasury is “actively” monitoring the bond insurers. According to Intrade.com, the odds of a US recession this year have declined to 65.3% from 77.5% a few weeks ago. The 10-year TIPS spread is falling to 2.27% today, despite the rise in oil. I expect the US job market to improve back to very healthy levels over the intermediate-term without generating substantial unit labor cost increases.