Domestic Goods More Attractive as Prices of Imports Rise : Trade Deficit Declines, Inflation Eases
The nation’s trade deficit fell slightly in April for the second consecutive monthly decline, while inflation eased in May as wholesale prices rose only 0.3%, the government announced Friday in two reports.
The reports were widely interpreted as good news for an economy that had been battered for three years by mounting trade deficits and spooked in recent months by fears that much higher inflation is around the corner. “What had the potential of being a major source of very bad news turned out to be a source of very good news,” Allen Sinai, chief economist for Shearson Lehman Bros. of New York, said. “Fears about runaway inflation should ease, and it appears the worst is over on trade.”
‘A Small Step’
The second month of trade improvement is “the right trend,” said economic forecaster David Wyss of Data Resources Inc., in Lexington, Mass., noting that domestic products are finally becoming more attractive to consumers as the dollar’s decline in value makes imports more costly. “It’s a small step, but it’s in the right direction.”
In its monthly trade report, the Commerce Department noted that the $13.3-billion trade deficit for April not only was $300 million lower than in March but $400 million below the monthly average for the first quarter of 1987. Although exports declined, imports declined even more, for the second month in a row.
“We will see occasional monthly setbacks, but the improving trend will continue,” Commerce Secretary Malcolm Baldrige said in hailing the reports. “The success of domestic producers in regaining market share will have a sizable effect on growth in output and employment this year.”
Surge in Food Prices
In the wholesale price report, the Labor Department attributed most of the 0.3% May increase--less than half the 0.7% spurt in April--to a continuing surge in food prices, especially meat. Energy prices were unchanged after several monthly increases, and prices for finished goods other than food and energy were actually lower, by 0.1%.
“At the consumer level, the price report looks very encouraging,” said Donald Ratajczak, director of the economic forecasting project at Georgia State University in Atlanta. “We are seeing a reasonable number of corrections from the higher prices we had been getting in the past few months: apparel, home electronics, passenger cars. That’s encouraging, it’s not a sign that inflation is intensifying.”
But Ratajczak warned that there were some ominous signs in the prices of crude goods, such as raw cotton and steel. Crude goods prices jumped 3.1% in May after a 2.8% increase in April. The increases are likely to show up later in higher consumer prices.
Economists were pleased by the unexpectedly moderate price changes of certain finished goods. The wholesale price of women’s apparel was down 0.3%, men’s apparel was up 0.1% and home electronics was down 0.3%.
All those products are sensitive to import competition, and prices might have been expected to rise sharply as the cheaper dollar has made imports more expensive.
‘Holding Prices Down’
The fact that those prices did not leap forward “suggests that domestic producers are trying to get their markets back,” Wyss said. “They are holding prices down to take advantage of more competitive prices and are not just fattening their profit margins. That is a good sign.”
Consumers seem to be responding, Sinai said.
” . . . The decline in imports raises the question (of) whether the substitution of American goods for foreign goods is finally in process,” he said.
In addition, deficits with the trading partners that have most consistently carried surpluses with the United States showed a few small, scattered declines. The trade deficit with Japan was virtually unchanged at $4.9 billion, but the deficit with Canada fell to $1.3 billion from $1.5 billion, with West Germany to $1.5 billion from $1.6 billion and with all of Western Europe to $2.3 billion from $2.5 billion.
