The Wall Street Journal had an amusing article a few days ago in which analysts bumped up GDP forecasts for numerous reasons including inventories, exports in general, and soybeans in particular. Let’s investigate the claims.
Please consider Soybeans Are Fueling U.S. Economic Growth (But Not for Long).
U.S. agricultural exports have surged the past two months, helping cut the trade deficit and boosting the outlook for short-term economic growth.
One big factor? Soybeans. Bumper harvests at home, crop shortfalls in South America and solid demand—especially from China—have propelled international feed sales.
“Soybean exports will add about 1% to [third-quarter] GDP growth,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients.
Mr. Shepherdson is forecasting 4% annualized growth in third-quarter gross domestic product, a broad measure of economic output.
That’s a big improvement from 1.4% GDP growth in the second quarter and 0.8% in the first. But it does little to alter the longer-term outlook. First, exports are likely to return to trend while depleted crop inventories would be a drag on GDP. Second, the economy has averaged a modest 2.1% growth rate over the course of the expansion, a trajectory that seems unlikely to change despite some noise from quarter to quarter.
“The soybean boost is indeed a one-time thing. It has no implications for trend growth and likely will reverse over the next couple quarters,” Mr. Shepherdson said.
Shifting Outlook
Following the commerce department international trade report on September 29, other analysts bumped up their forecasts as well.
- J.P. Morgan Chase revised its outlook to 3% annualized growth in the third quarter, up from its earlier estimate of 2%.
- Amherst Pierpont Securities boosted its forecast to 3.7% from 3.5%.
- Macroeconomic Advisers raised its tracking forecast by three-tenths to 3.1%.
- Barclays inched up to 2.6% from 2.4%.
Is JPMorgan reading Shepherdson? The other way around?
Regardless, Shepherdson’s forecast got me curious about a number of things, namely soybeans and the trade deficit.
Trade Deficit Shrinks More Than Exected
In Trade Deficit Shrinks a Bit More Than Expected: Impact on GDP Estimates? I took a stab at the impact.
Impact on GDP?
The impact on tomorrow’s Atlanta Fed GDPNow estimate and the FRBNY Nowcast estimate for 3rd quarter GDP is guesswork two ways.
First, I do not know what their model predicted. Second I do not know how their model will react even if I did know what it predicted.
Thus, this seemingly good result might not turn out that way if the models predicted even better results.
Nonetheless, I am willing to take a stab: The impact from this report will be small, but slightly positive on third quarter GDP estimates (+0.05 to +0.10) percentage points.
GDPNow Impact
I was on the low side. A check of the GDPNow Model Data (shows the net effect of all exports went from -0.13 to +0.13 between September 28 and September 30.
The deficit shrinkage will add something like 0.26 percentage points to third quarter GDP. Soybeans are only a tiny portion of exports.
Balance of Trade
Balance of trade chart from Census Bureau.
That chart is through August. Is another stellar month coming up in September? Based on soybeans?
Price of Soybeans
At $9.63 per bushel, the price of soybeans is up from a year ago, but down substantially from second quarter.
It’s not clear why soybeans will add anything to third quarter GDP. Are exports soaring?
USDA Soybean Statistics
Let’s investigate USDA Soybean Statistics as of September 2016.
*Crop Year: September 1 through August 31
If we assume soybean exports will rise by 100 million bushels from the previous year, and apply all of it to third quarter GDP, at a price of $9.63, soybean exports would add $963 million to GDP.
The entire production increase from last year is only $2.8 billion.
From first to second quarter, Real GDP went from $16,525 billion to $16,583 billion, an increase of $58 billion (seasonally adjusted annualized).
Factor GDP by quarters if you like, but also factor soybeans exports by quarters as well.
Soybean Exports
Chart from Allendale Weekly Export Sales report on 8-11-2016.
In the Allendale Weekly Export Sales report on 9-22-2016 (for the period September 8-15) we find this blurb.
US: Soybean export sales totaled 875,724 metric tonnes (all 2016/17, no 2017/18). This was under the 900,000 – 1,200,000 trade expectation. USDA’s whole-year goal comes to 1.985 billion bushels, a new record. That would be 2% over last year and 22% over the five year average.
Amusingly, corn seems better.
US: Weekly export sales for the period from September 8 – 15 were released this morning. Corn export sales totaled 921,903 metric tonnes (all 2016/17, no 2017/18). This was just over the 700,000 – 900,000 trade estimate. USDA’s goal for the year, at 2.175 billion bushels, would be a record. It would be 14% over last year and 36% over the five year average. With only two full weeks figured of the new crop year done, our total sales come to 707 million bushels, 84% over last year and 43% over the five year average. Due to good pre-September sales, we are ahead of the pace needed.
In September, only the incremental export increase (if any) from August will add to 3rd quarter GDP. We had a huge jump from July to August, is another huge jump coming? A reversal actually seems more likely.
Regardless, the notion that soybeans or corn exports (corn at $3.48) will add 1% to 3rd quarter GDP is ridiculous.
Mike “Mish” Shedlock
