Trade deficit hit a record in March

Consumer demand, oil imports spur high of $30.2 billion

Investors nervous

Good, bad sides to trade imbalance, but some fear worst

May 20, 2000|By William Patalon III | William Patalon III,SUN STAFF

The U.S. trade deficit swelled to an all-time high of $30.2 billion in March, thanks to a record bill for foreign oil and a consumer appetite for cheap imports that refuses to be satiated, the Commerce Department said yesterday.

"Most of what we buy is imported - it's a fact of life," said Steven F. Silber, an executive with Baltimore-based Changes, a seven-store retail chain that specializes in young men's clothing. "You don't like to see it, but most of the wares we purchase come from places like Sri Lanka, China, Hong Kong, or eight or nine other locations. Our business ... is about 17 percent ahead of last year - which was a record year for us."

Investors expressed their concern about the ballooning imbalance by selling stocks. The Dow Jones industrial average fell 150.43 points, or 1.4 percent, to end the day at 10,626.85. The technology-heavy Nasdaq composite index dropped 148.31 points, or 4.19 percent, to finish the week at 3,390.40.

The deficit represented a 5.1 percent jump from the revised figure of $28.7 billion for February, despite a rebound in exports of American-made cars and farm products, the government said. Record exports were more than outdone by the all-time-high of $117.4 billion in imported goods and services. At a monthly record of $7.6 billion, imported crude oil was a key culprit, with average prices touching their highest point since the 1990 Persian Gulf crisis.

The trade deficit with China narrowed to $5.1 billion in March from $5.6 billion in February. But the trade gap with Japan widened by $100 million to $6.8 billion.

The bulging deficit now joins this year's sell-off in stocks, a possible resurgence of inflation, and a central bank that's aggressively tightening credit as the latest economic worries.

Even so, the hefty-and-growing trade imbalance isn't necessarily a problem - at least not yet, said Steve H. Hanke, professor of applied economics at the Johns Hopkins University and chairman of Friedberg Mercantile Group Inc., a currency trading house. Trade deficits go hand-in-hand with surging economies like the U.S. economy, with three straight quarters of better than 5 percent growth.

"When an economy is growing this fast, we're just importing more than we're exporting to fill in the gaps that accompany the rapid growth," Hanke said. "It doesn't necessarily have to be a yellow or red [flag]."

Actually, cheap imports have helped fuel a boom that until recently appeared so perfect that it earned the "Goldilocks Economy" sobriquet. Markets abroad were struggling so much that foreign producers were selling most of their wares in the United States, while foreign investors were allocating all their money here.

Those investments were key since it takes foreign capital to finance a trade imbalance. Since these transactions and investments were conducted mostly in dollars, the U.S. currency bulked up against other currencies - giving us access to cheap wares, as well as a flood of capital that buoyed stock prices and kept technology start-ups awash in the cheap money needed for growth.

This once-perfect setting is fading, despite a rise in the nation's need for foreign money to plug the trade gap. On the heels of a record $268 billion last year, the trade deficit has reached $86.3 billion in the first three months of this year - an annualized pace of $345 billion.

If U.S. imports keep outpacing U.S. exports, the nation's economy becomes increasingly vulnerable to inflation, spiking interest rates, dropping stock prices and a neck-snapping slowdown in economic growth, economists say.

The seeds of those maladies may already have been sown. Inflation is more a worry now than at any other time recently, and the stock market has given back some of its 1999 gains. Those bothersome developments could leave foreigners feeling like there's too much risk to keep investing big chunks of money here.

With economies overseas on the mend, foreigners may see better odds for handsome profits by investing at home.

If that happens, U.S. interest rates may have to go higher to keep bringing in the money that plugs the gap and the dollar could fall in value against other currencies. Enough of a drop could touch off inflation, since it would cost more to buy foreign goods - including imported raw materials that are important ingredients of products made in U.S. factories.

"That risk grows larger as the deficit grows," said Mark Zandi, chief economist for RFA Dismal Sciences, an economic research and forecasting firm based in West Chester, Pa.

Wire services contributed to this article.

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