Bank stock investors should take note of the nation's soaring trade deficit, which may telegraph the direction of both the economy and the stock market, economists said.
In the latest data available, the gap between the value of imports and exports of goods and services widened to a record $17 billion in January, much more than expected. On a 12-month basis, the deficit increased to $237.4 billion.
The size of the disparity may make a considerable dent in first-quarter economic performance, which could lower already shaky earnings prospects and hurt stocks.
The figures suggest that "real net exports may fall by over $25 billion in the first quarter and cut 1.5 percentage points off (gross domestic product) growth," according to Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York.
"It would be an eye-opener if first-quarter growth comes in around 3% (annualized)," said Nicholas S. Perna, chief economist at Fleet Financial Group in Boston. That would contrast sharply with the sizzling 6.1% expansion rate of the fourth quarter.
The trade figures highlight an unusually stark two-tier global economic situation right now, with the United States strong and others weak.
"The U.S. is really the only source of demand in the world right now," pointed out A. Gary Shilling, an economist and money manager who heads his own firm in Springfield, N.J.
Ultimately, the global economy will rebalance itself as business recoveries get under way outside the United States, and trade figures will reflect the change. How that unfolds is a worry for some observers.
"How fast it happens is the important thing," Mr. Perna said.
"A rapidly falling dollar exchange rate would raise inflation fears, because imports would cost more," he said. "It would be just the opposite of what has been happening over the past couple of years with a stronger dollar, on average, holding inflation down."
In reaction, bond investors would undoubtedly drive yields up, perhaps braking the economy sharply. That would be an almost certain prescription for falling bank stock valuations.
The trade deficit mirrors how robust the nation's economy is, both on its own and in relation to other economies, Mr. Perna said.
"We've been growing like gangbusters, sucking in imports," he said. "Meanwhile, everybody else has been either growing less rapidly or is in recession, meaning our exports to them are down."
Even if the healthy U.S. expansion continues, relative improvement by other economies would alter the trade balance, with important consequences.
"If interest rates and stock markets elsewhere pick up, narrowing the spreads between U.S. rates and equity returns and those abroad, the effect would be to push the dollar down," he said.
The situation recalls the 1980s, Mr. Perna noted. After setting postwar records, the dollar peaked in late 1985 and early 1986 against other major currencies, then fell by a third in 18 months.
Not coincidentally, inflation and interest rates picked up. Then stock prices dramatically readjusted in the October 1987 crash.
"I'm convinced that a lot of what happened in '87 was dollar-exchange- rate-driven," Mr. Perna said. "The biggest mystery is why it took the stock market so long to catch on."
History doesn't have to repeat itself, he said. "If the U.S. slows quickly and others pick up quickly, a lot of downward movement in the U.S. trade deficit could be accommodated without a sizable change in exchange rates." That is the soft-landing scenario.
The bumpier prospect is for higher rates, perhaps even a Federal Reserve rate hike, since, Mr. Perna said, "I doubt it is possible to have a sharp decline in the dollar without higher rates and a hit to the stock market."
