Trade Gap Hits Record $18 Billion : Weak Dollar Not Aiding U.S. Firms, July Figures Show
The nation’s trade deficit soared to a record $18 billion last month, the Commerce Department estimated Friday, hitting the economy much harder than expected with a blow that is likely to hold back growth for the July-September period.
Despite strong spending by consumers, the continuing problems of the manufacturing and agricultural sectors show few signs of diminishing. Analysts had been hoping to see at least a glimmer of evidence that the steady decline in the dollar against major currencies since March of last year had finally begun to make U.S. goods more competitive against foreign products.
“Waiting for a turn in trade may be like waiting for Godot,” said Allen Sinai, chief economist at Shearson Lehman Bros., a major New York investment firm. “The heart of the problem is that Americans just continue to buy so much from abroad.”
Drag on Economy
The stubborn trade deficit has been an increasing drag on the U.S. economy because spending on imports siphons off dollars that otherwise would be spent on U.S. products, notably manufactured goods, with consequent declines in domestic sales, profits and employment.
Based on preliminary figures, imports jumped in July to $35.7 billion from $33.2 billion the previous month, far exceeding the $17.7 billion in U.S. exports for July. For the first seven months of the year, the estimated trade deficit reached $102 billion, running far ahead of the $80.9-billion trade gap over the same period last year.
At its current pace, the trade deficit would widen to about $175 billion for all of 1986, compared to the record $148.5-billion deficit registered last year. The previous one-month record was $16.5 billion, set last January.
Revisions Lower Deficits
The preliminary estimate of the trade deficits for May and June was $14.2 billion in each month. The revised figures, based on more recent accumulation of data from importers and exporters, put the deficit for May at $13.1 billion and for June at $13.3 billion.
“There is no silver lining in the trade report,” said David Berson, an economist at Wharton Econometrics in Philadelphia. “U.S. manufacturing is going to continue to be in the doldrums, primarily because of trade. Even after the revision, it is going to look terrible.”
Before the report was released, rumors had circulated on Wall Street that the reported trade deficit would hit $16.1 billion. The higher-than-expected figure sent the dollar plunging on international currency markets and contributed to a further decline in interest rates in weak trading on the eve of the Labor Day holiday.
Sales of new single-family homes also declined last month, dimming one of the few bright spots in the economy down to its lowest level since October, 1985.
New houses were sold in July at an annual rate of 658,000, down for the fourth straight month, and analysts said that only modest improvements can be expected without even deeper cuts in mortgage rates, which have recently dropped below 10%.
Despite the drop, new home sales are running at a pace well ahead of recent years.
“It’s going to be a good year, relatively speaking, the best since 1978,” said Michael Sumichrast, chief economist at the National Assn. of Home Builders.
The pattern of home sales echoed the regional disparities in the U.S. economy. In the South and West, where worldwide gluts of food, oil and minerals have depressed prices and added to local unemployment, sales fell sharply. By contrast, sales improved in the Northeast and the Midwest.
Home Prices Rise
The average sales price of a new single-family home hit a record $116,900, up from $109,800 in June.
On the trade front, economists struggled to explain why the dramatic plunge in the dollar still has not fostered a narrowing of the trade deficit. “We thought the trade figures would be starting to move in the right direction by now,” confessed David Wyss, an economist at Data Resources Inc., a Lexington, Mass.-based forecasting firm.
Wyss cited several reasons for the continued deterioration, arguing that Latin America’s overburdened debtor nations have practically evaporated as an outlet for U.S. goods, that Asian developing nations like Taiwan and South Korea have not allowed their currencies to rise against the dollar and that European and Japanese exporters have simply reduced their profit margins rather than see their inroads into the American market scaled back.
“But, despite all those factors,” Wyss added, “it shouldn’t be getting this much worse.”
The Reagan Administration has been counting on a narrowing in the trade deficit to help boost economic growth during the second half of the year from the dismal 2.2% gain reported for the first six months.
“The failure of trade to respond so far to the decline of the dollar presents a monumental challenge to policy,” Sinai said.
