August 14 2012
LAST WEEK IN THE MARKETS AND THE ECONOMY
To all clients:
It is important for investors – in fact, for anyone thinking about the macro-economy’s dynamics – to separate cyclical from secular events. Market participants and commentators often use “short-term” as a synonym for cyclical, and “long-term” as a synonym for secular. While not entirely correct, this distinction can be a practical way of distinguishing groups of macro phenomena. Cyclical events are related to the stage of the business cycle. That is, they represent the forces that cause a country to move away from its underlying growth path. Much of the economy’s weakness today is cyclical. The housing crisis, for example, has caused households to tighten their spending. When this is resolved, it will go a long way toward putting the economy back on its “normal” track.
Secular events, by contrast, change the underlying growth path itself. Consider the US international trade balance. All else the same, when we are in recession, we buy less from abroad; in expansion we buy more. And again all else the same, when out trading partners are in recession, they buy less from us; in expansion, they purchase more. These are cyclical phenomena. The first and fourth accelerate our economic growth, the second and thirds slow it down. A secular event, on the other hand, changes the “all else the same.” When U.S. goods and services become more competitive internationally, or when they become more desirable independently of price differentials, the country’s growth rate shifts to a higher level.
There is some recent evidence of this happening. Last week we learned that the US trade deficit narrowed significantly during June, to $43 billion from $48 billion the month before. Our exports increased by $1.7 billion, to $185 billion, a monthly record. Foreigners purchased more raw materials, capital goods and consumer goods, even cars. At the same time, we imported $3.5 billion less than in May, or $228 billion, which, on a relative scale, is even more impressive than the exports increase. Sure, much of the decline is due to a drop in the world price of oil, which reduces the dollar value of imports. Nevertheless, the trend, at least until now, is unmistakably positive.
