Pretty Persuasion

JACKSON HOLE, Wyo. -- The

trade deficit

narrowed to $14.39 billion during the fourth quarter of 1998 from $15.5 billion during the third. As a result, net exports (exports less imports) contributed 0.46 percentage point of the 6.1% by which

gross domestic product

grew during the final three months of the year. That marked the first net-exports contribution to growth since the fourth quarter of 1996 (head to this

link and see Table 2).

Thursday's news that the January trade deficit

clocked in at $16.99 billion will prompt downward revisions to first-quarter growth -- and rightly so. Net exports seem unlikely to add to GDP for a second straight quarter. They could, mind you -- a proxy trade deficit created by subtracting the

NAPM

import

index from the export index shows marked improvement through February -- but there are better bets around (take

Gonzaga

and the points?).

I already hear market participants and forecasters making a big, big mistake by taking comfort in the fact that the first-quarter GDP number is likely to print lower than it would have before the January trade number was released. The lower the GDP number, the happier the

Fed

-- so the thinking goes.

But that ain't necessarily the case. What the Fed wants more than anything right now is to see a material deceleration in the pace of final domestic demand. That is

not

the same thing as a smaller GDP number.

Something called

final sales to domestic purchasers

(or FSDP) is arguably the most important line in any GDP report. (You can find these numbers in the "Addenda" section of Table 1

here.) FSDP equal GDP less exports plus imports less the change in business inventories. In plain English, FSDP equal final domestic demand; this is the beast the Fed wants to see decelerate materially.

On a real (inflation-adjusted) basis, FSDP rose 5.1% last year, but they were rising at a 5.6% year-on-year rate when the first quarter began. On a nominal basis, FSDP rose 5.7% last year, but they were rising at a 6.1% year-on-year rate when the first quarter began. In other words, when the new year began 76 days ago, the pace of final domestic demand -- on both a real and a nominal basis -- was still accelerating.

And, because exports do not figure into the final demand calculation, the fact that the trade deficit widened in January -- or that it will probably widen between the fourth quarter and the first -- will do nothing at all to help produce the slowdown the Fed craves. (For intuition here, remember last year. The "sorry" trade picture clamped down on the

GDP

growth rate to the tune of 1.13 percentage points. Yet

FSDP

still shot up to 5.1% in 1998 from 3.7% in 1997.)

The point here is that it's tempting to look at a downward GDP revision and think, "Cool. However worried Fed members were about growth before, they're less worried now." And almost every analyst out there will tell you to think that way.

But don't. Close your ears to the song of the Siren. She'll eat your lunch.

Final domestic demand continued to scream through February, and that's what most worries the Fed.

Side Dish

Best write-in

yesterday (thanks Lizzie) was Our Drinking Team Has a Rugby Problem.

I am terribly sad to report that I can no longer answer all of your mail. There's simply too much of it. It is positively priceless -- your feedback makes this column better, period -- and I've worked hard to answer just about every note I've gotten since I signed on here. But anymore I would need full-time help to get to it all. (Hey

Kansas

! You hear that?!)

Please don't let the fact that I can't answer everything prevent you from writing. I will continue to read all of the notes I get, and I will respond to as many of them as I can -- especially the exceptionally clever ones, and the musical-reference ones, that some of you have been sending in since this silly column was born.

Best muse?

Erato

Euterpe

Melpomene

Terpsichore

Polyhymnia