U.S. Loan Delinquencies & Foreclosures Soar

Recent Financial Developments and the U.S. Economic Outlook from the Federal Reserve Bank of San Francisco can be found here.

While China's balance of trade on goods has risen steadily, it has been the rise in exports that has captured most attention. Now attention is beginning to the paid to the deceleration in imports that has begun to take place in the last year or so. The year to year monthly increase in imports had generally been greater than that of exports, but in the last year or so, this relationship has been reversed as can be seen in the first chart that shows the year to year increases in exports and imports.

A rise in the yuan could account for some of the recent dampening of imports, but the rise of the yuan so far has been minimal suggesting that other factors may be at work. While outsourcing on the part of the western industrialized countries has led to an increase in China's exports, in the initial stage of the process it raised China's demand for intermediate goods which it had to import. As China increased the sophistication of its own production, the need to import intermediate good diminished and resulted in a growing trade surplus with most western countries. It appears that this process is now taking place with some of the Asian countries, such as South Korea and Singapore that have outsourced production to China. These countries are now experiencing a decline in demand from China for intermediate goods. China's imports from Singapore have very definitely leveled off and those from Korea, somewhat less so. China's exports to Singapore and Korea meanwhile, continue to increase with the result that China's surplus on trade in goods with Singapore has widened and China's deficit on trade with Korea has narrowed. These trends are shown in the second and third charts.

The threat to growth in Europe has been named in the past weekend’s G-7 meeting as primarily due to the strong Euro. The Euro remains a threat to growth though Germany’s finance minister was quite blasé about it in comparison to Trichet (of France and the ECB) and LaGarde (FinMin of France). Still one important factor remains, the consumer, and there the rise in energy prices remains a problem as headline inflation is eroding real wages. Real wages may not be deemed ‘growth threat number one’, but just because your picture is not framed at the top of the most-wanted list at the post office is no reason to count the risk as benign. Real wages are dropping on the sequential growth rates at an increasingly rapid pace. In the third quarter they are falling at a pace of nearly 5% annualized.