Market rallies, despite deficit

Aug. trade gap record has less impact than Fed's spending report

October 13, 2006|By New York Times News Service

Maybe the sputtering housing market will not be that big a drag on the economy after all.

Falling gasoline prices are leaving Americans with more money to spend, and inflation has become less of a threat in recent weeks, according to a report released yesterday by the Federal Reserve.

Wall Street reveled at the news. Stock prices - already buoyed by a series of strong corporate earnings announcements from companies like McDonald's and Costco - surged even higher after the Fed's report, the so-called beige book for the color of its cover, came out yesterday afternoon.

The benchmark Standard & Poor's 500 stock index jumped to its highest close in more than five and a half years. The Dow Jones industrial average, which last week broke a record high that had stood since 2000, climbed past 11,900 to close less than 53 points short of 12,000. The Nasdaq composite gained more than a point and a half.

A separate report yesterday showing that the nation's trade deficit reached an all-time high in August was apparently an afterthought for investors. The Commerce Department said that on a seasonally adjusted basis, Americans imported $69.9 billion more than they exported, up 2.7 percent from a $68 billion deficit in July. That increase was in large part due to near-record petroleum prices.

While the beige book was hardly a glowing picture of the nation's economy, it did strike a generally optimistic tone. It described a "widespread cooling" in residential housing but noted that growth in commercial real estate activity was picking up some of the slack.

And there were a handful of areas where home sales "showed signs of resilience," the report said. Manhattan, Houston and Sioux Falls, S.D., were among these pockets of strength.

"It seems like things are still stable," said Marisa DiNatale, an economist with Moody's Economy.com. "There may be moderating growth, but it's certainly not a drastic slowdown."

Other potential problem spots in the economy - rising prices and slower consumer spending - do not appear to be much of a problem at all in many areas of the country, the report said.

Consumers spent freely, taking vacations and shopping for back-to-school items. Wage growth was described as generally "modest." And there were few signs of pressure from higher prices as the cost of gasoline dropped.

Economists said falling fuel prices should be reflected in the next trade deficit report. Energy costs were the major reason for the widening trade gap in August, with the deficit in petroleum-related products accounting for nearly all of the $1.9 billion increase.

The amount that Americans spent on foreign-made toys, household appliances and electronics also rose.

China gap widens

"The trade balance should improve significantly soon," Dimitry Fleming, an economist with ING, said in a research note. "August, however, was never going to be the starting point with the lagged effects of higher oil prices."

The growing trade imbalance with China was another major factor in the ballooning trade deficit. The unadjusted trade deficit for August was $79 billion. Nearly a third of that, $22 billion, represented the gap in trade between the United States and China.

The numbers defied expectations. Economists who were surveyed before the numbers came out predicted that the overall deficit would fall in August, but it rose on a seasonally adjusted basis by $1.9 billion from July.

When the gap hit a record in July, economists said they believed the numbers were nearing a peak. But as energy prices remained high this summer, the deficit continued to swell.

Still, many economists said yesterday that they now believed the bottom was near.

"This is probably as bad as it gets," wrote Paul Ashworth, senior United States economist with the economics research firm Capital Economics.

Chinese surplus

The Chinese reported their own trade numbers yesterday, which showed a surplus of $15.3 billion for September. China's trade surplus hit a record $18.8 billion in August. In response to the imbalance, China has heeded calls from U.S. officials to allow its currency to rise in value. But as yesterday's numbers show, the gap remains vast.

While U.S. reliance on foreign goods is showing no signs of weakening, exports also remained strong.

After declining in July, exports grew in August by 2.3 percent to $122.4 billion. But that rate of growth was not strong enough to offset the rise in imports, which reached $192.3 billion in August. That was an increase of 2.4 percent.

Peter Kretzmer, senior economist with Bank of America, said such strong import growth is a sign the economy will expand at a faster rate in the final months of the year.

"We've been surprised by how strong import growth is," he said. "This strong domestic demand may be a bit of a harbinger of a strong domestic economy going into the fourth quarter."

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