Thirsty for Econo-Data? Here Is Your Thursday Roundup

Happy Day Before Friday, and what means of celebrating could be great-a than data? (Sorry.) Economic record-keepers globally were busy bees today, releasing a smorgasbord of stats for investors to mull over. As always, they are all backward-looking, and stocks generally care about what happens over the next 3 – 30 months, not what happened a few weeks ago. But we did find some nuggets of interest, so let us share.

The record-high trade deficit is not the real story.

The US imported $80.9 billion worth of goods and services more than it exported in September, prompting the usual flurry of headlines hyping the record-high gap.^[i] We will leave them to stew over that meaningless statistic, which has no bearing on the country’s economic health. After all, imports represent domestic demand, and foreign investment inflows offset the trade deficit. It is an accounting factoid. Nothing more.

But we think the stats under the hood offer a pretty good snapshot of how the global logistics logjam works. Exports of goods fell -4.7% m/m, the biggest drop since last year’s lockdowns, while goods imports rose 0.8%.^[ii] The mismatch seemingly stems not from plunging factory output, which dropped only -0.8% in September, but from a lack of shipping containers.^[iii] Or more specifically, a lack of readily available empty containers. The actual containers are everywhere, stacked a mile high at ports, in empty lots surrounding ports and at inland freight hubs. But there aren’t enough truck chassis and drivers to get them to warehouses for unloading. Nor are there enough warehouse workers to do said unloading. Or enough chassis and drivers to then take the empty containers to the exporters who are desperate to fill them. Adding insult to injury, countless containers have made the return trip to Asia empty so they can swiftly ferry more goods to us. Reloading them first would take too much time, potentially exacerbating US supermarket shortages.

The upshot of this is that, despite the scores of ships idling by major US ports, many are still docking and unloading, keeping shortages here milder than they might otherwise be. That 0.8% rise in goods imports is good news. But it does appear the logistics problems are hitting exporters disproportionately, which is not so good. On the bright side though, most expect this to even out early next year, as shipping traffic slows after the holidays and rising wages entice more drivers into the trucking industry. That should eventually unleash the backlog of pent-up exports and prevent all those stacked containers from becoming permanent art installations.

Seriously, that huge productivity drop is good news.

Yes, really. We know productivity’s -5.0% annualized drop in Q3 is the biggest since 1981, and we know it doesn’t sound good. Some pundits say it points to inflation getting worse from here. But we interpret the data differently.

The BLS’s productivity measure is output divided by hours of labor. Both sides of that fraction have suffered big disruptions from lockdowns, with output recovering faster than hours worked. (Exhibit 1) Output, which hit a record high last quarter, passed its pre-lockdown peak in Q2. Hours worked is still a mite below its prior high. But it did catch up quite a bit in Q3, rising 7.0% annualized—a good sign that businesses are starting to overcome the labor shortage.^[iv]

Exhibit 1: Productivity Deconstructed

Source: FactSet, as of 11/4/2021. Output and Hours Worked, Q1 2017 – Q3 2021. Indexed to 100 in 2012.

Also lost in the shuffle is the simple fact that productivity isn’t in the doldrums. The level of output per hour worked is actually at its fourth-highest reading on record, thanks to huge efficiency gains companies have made since the pandemic began. Q3’s drop simply reflects companies’ exhausting their ability to do more with less. The last couple of years are basically an outsized version of productivity’s usual path surrounding a recession.

Exhibit 2: The US Is Still Pretty Darned Productive

Source: FactSet, as of 11/4/2021. Output per Hour Worked, Q1 2017 – Q3 2021. Indexed to 100 in 2012.

Actually, German factory orders weren’t weak.

“Lockdown skew” also sums up our take on German factory orders, which eked out a 1.3% m/m rise in September after August’s -8.8% drop. Pundits described the small rebound as feeble, implying Germany’s industrial sector is being severely hobbled by the aforementioned supply chain problems. Yet here, too, we think it is necessary to look further back in time to put the most recent results in context. Factory orders took a severe hit during last year’s lockdowns, driving big catch-up growth when the country reopened—which happened in fits and starts through summer 2021. Much of Europe also reopened this summer, which we think explains the big boom in July orders and subsequent drop-off in August. Yet even with orders remaining below that peak, they remain far ahead of orders in the years before the pandemic—and about in line with demand during Germany’s 2016 factory boomlet.

Exhibit 3: September German Factory Orders in Context

Source: FactSet, as of 11/4/2021. German Industrial Orders, real and seasonally adjusted, November 2001 – September 2021.

Now, high orders may not predict big output growth in the immediate future, as some factories are short on parts and labor. IHS Markit’s latest purchasing managers’ indexes show supplier delivery times remain strained and order backlogs are piling up. But as we have written before, supply issues are likely—all together now!—transitory. They are a headwind, but they don’t signal creeping economic weakness the way a demand dearth would. And based on factory orders, demand just doesn’t seem to be a problem today.