Trade deficit surged in June

$3.4 billion rise is likely to bring cut in GDP gain

Static exports, oil prices blamed


The nation's trade deficit surged in June to its highest level in four months, pushed up by the rising cost of imported oil and the reluctance of foreigners to purchase more of what America produces.

The $58.8 billion deficit in the trade of goods and services was $3.4 billion above the slightly revised May level, the government reported yesterday. Imported crude oil and petroleum products accounted for roughly half of the increase, and with oil prices continuing to rise since June, the outlook is for even larger trade deficits.

"There's not a lot of relief in sight," said Nariman Behravesh, chief economist at Global Insight, a forecasting and data gathering firm. "I would not be surprised to see the monthly deficit go above $60 billion by fall and stay there."

The trade deficit narrowed in the late winter and early spring, getting as low as $53.6 billion in March, and the Commerce Department had assumed that the June number would continue that trend.

That assumption was incorporated into the department's initial estimate of economic growth for the second quarter, which ended June 30.

The initial estimate was for a 3.4 percent rise in gross domestic product. That was published in late July, before the June trade numbers were available. Now the June deficit is likely to shave one- or two-tenths of a percentage point off the GDP estimate, some economists say.

The reason is that the extra outlay for imports represents money diverted from spending for domestically produced goods and services. Domestic production is the source of economic growth. "We had expected an upward revision in the second-quarter GDP estimate on the basis of other recently released data," said Edward McKelvey, a senior economist at Goldman Sachs, "but trade kind of goes in the opposite direction."

No country played a bigger role than China in swelling the June trade deficit. China's purchases in the United States rose by a meager $96 million, to $3.4 billion, but its exports to this country jumped by $1.9 billion, to a total of $21 billion. Textiles, apparel and electronics products played significant roles in the surge, which produced a $17.6 billion trade deficit with China - eclipsing the $12.8 billion June deficit with Europe, in second place.

U.S. exports rose

China's lopsided imbalance captures headlines, overshadowing the role of U.S. exports, which almost always rise. Indeed, they were a record $106.8 billion in June. But they have been stuck at nearly that level since April, despite a 15 percent decline in the value of the dollar over the past three years against the currencies of the United States' largest trading partners. A cheaper dollar should stimulate exports by making them less expensive in foreign currencies, and stimulate production at home by making imports more expensive.

Behravesh counts on this to happen, but first "the dollar must fall a minimum of at least an additional 20 percent, including at least that much against the Chinese yuan." The yuan so far is down 2.1 percent, a result of the Chinese government's announcement in July that it would allow the yuan to appreciate gradually.

Some economists argue that faith in exchange rates is misplaced. They say that consumption and economic growth are much stronger in the United States than in other countries and that Americans, as a result, bring in imports at a greater pace than people abroad.

"The trade deficit is much more responsive to the growth and consumption differential than to exchange rates," said David Malpass, chief economist at Bear, Stearns & Co., representing this view.

Financial services

Other economists are concerned, however, that some of the products once exported from the United States are no longer made here. They note that while the trade surplus in services - particularly financial services - is rising, the amounts involved are too small to offset the swelling imbalance in goods.

Television sets and VCRs, for example, are either no longer made in the United States or are made in small numbers. But demand is strong, and imports of these items totaled $8.7 billion in June, overwhelming exports of $1.9 billion. Vehicles hew to a similar pattern - $16.4 billion in imports versus $6.2 billion in exports - and so does machinery, at a moment when investment by business is rising.

"There is a question now whether we can go back to making the stuff in the United States that Americans want," said Catherine L. Mann, a senior fellow at the Institute for International Economics. "I don't know."

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