5-9 Dec 2012- Data Shows U.S. Economic Difficulties

DATE	REPORT	CONSENSUS	PREVIOUS
Dec. 5	ISM services	53.9%	52.9%
Dec. 5	Factory orders	-0.3%	0.3%
Dec. 8	Jobless claims	395,000	402,000
Dec. 9	Trade balance	-$42.2 bln	-$43.1 bln
Dec. 9	Consumer sentiment	66.0	64.1

After a week of key employment and manufacturing-sector data, Wall Street can be forgiven for directing their focus away from the economic reports that come out of the Capitol this week and toward Europe ahead of key meetings there.

But Friday’s upcoming report on the trade deficit offers insight into what some believe is restraining the U.S. economy from running at its full potential.

“The positive is the trade gap has been narrowing, but make no doubt about it, one of the reasons we have lost so many manufacturing jobs is because of the heightened competition from overseas,” said John Lonski, chief economist of Moody’s Analytics’ capital markets research group.

The October deficit will likely narrow to just north of $42 billion from $43.1 billion in September, and much of that drain will come from China.

From January through September, the U.S. imported $552 billion more worth of goods than it exported, with roughly 40% of that gap coming from China.

That imbalance has long been a source of tension between the two countries, though one the administrations of both President Barack Obama and George W. Bush have been careful to not aggressively combat.

China is an important source of demand for multinationals like Caterpillar and General Motors , and although the costs of labor have increased in the Pacific Rim country, it’s still the overwhelming source of low-priced goods at retailers like Wal-Mart Stores.

Plus, at a time when rating agencies are admonishing the U.S. government for running up debt of over $14 trillion, China is an owner of $1.15 trillion worth of American debt, and probably a good portion of the $422 billion that the Treasury Department officially states is held in the U.K. (China uses London-based brokerage firms to buy American debt on its behalf.)

Of course, China isn’t buying U.S. debt as a favor, but as a pretty transparent attempt to artificially prop up the greenback against the Chinese renminbi, which in turn helps exports to the U.S. and elsewhere.

The Treasury Department, however, is reluctant to officially label China a currency manipulator — and it’s over a month late publishing its semi-annual currency report on foreign exchange — for fear that it would set off a wave of U.S. and China actions and counter-actions.

Already, a bill that could make it easier to sanction China has cleared the Senate on a bipartisan vote, but has yet to get voted on in the House, where the Republican leadership has thus far tried to steer around the issue.

Federal Reserve Vice Chair Janet Yellen said in a speech last week that China could be doing much more to promote imports, and not just through lifting the value of its currency.

She said increased government spending on social services would reduce the need for private savings. She also called on China to increase government attention on developing services-based companies rather than manufacturers, and for more assistance toward the country’s poorer regions.

Noting that China’s private spending as a proportion of GDP has actually declined over the last decade, she chided the country and others in the region for creating imbalances in the global economy.

“China and other emerging market economies have already taken some steps to promote household consumption, but the progress on this front has been slow and further measures are warranted,” the Fed’s number-two said.

Moody’s Lonski agreed that currency manipulation is only a small part of the issue.