June Trade Deficit Surges to $15.7 Billion; Dollar Falls

The nation’s trade deficit confounded expectations in June and soared to $15.7 billion, well above the average for the year and one of the worst monthly totals ever, the Commerce Department reported Friday.

Imports continued to surge during the month, in both volume and dollar terms, leading economists who hoped otherwise to concede that getting the trade deficit to manageable proportions will take longer than expected.

The first concrete reaction to the report was a weakened dollar on exchange markets. The dollar dropped against the West German mark, the Japanese yen and the British pound.

The Labor Department reported better news on the inflation front, with only a 0.2% increase for wholesale prices in July as food prices declined, offsetting higher fuel prices. And the Federal Reserve said that industrial production jumped 0.8% last month, its best performance in 15 months.

But economists warned that, in addition to pushing the dollar down, the trade deficit could push inflation higher later in the year and cause interest rates to rise.

The June deficit was about $2 billion larger than expected and, with a $14-billion deficit in May, was the second consecutive month that the monthly trade gap has increased.

Had the Commerce Department earlier this week not revised its export estimates upward to account for underreporting of trade with Canada, the June level would have been $16.3 billion, exceeding the record-setting $16.1-billion deficit of July, 1986.

Senate Majority Leader Robert C. Byrd (D-W. Va.), reflecting the sentiment of many Democrats that trade is a promising political issue, challenged President Reagan on Friday to “stop brandishing the veto pen” and accept the protectionist trade legislation that has passed both houses of Congress.

The June trade figures, Byrd said, “should silence the Pollyannas on trade in this Administration” who have contended that the trade deficit can be reduced without imposing sanctions, which could antagonize U.S. trading partners.

Although U.S. exports increased by $300 million over May and were $1.3 billion above the average for the first five months of the year, imports more than made up the difference. They soared by $2 billion over May and were a huge $3.7 billion over the January-May average.

This occurred despite the fact that a weak dollar has the effect of making foreign goods more expensive and U.S. goods cheaper and, theoretically, more attractive to consumers.

Oil Not to Blame

The import surge could not be blamed on petroleum imports, which increased somewhat, as they always do in early summer because of seasonal leisure travel. Most of the buying was in manufactured goods--the very arena in which American producers have been struggling for nearly five years to compete with foreigners.

“Only a tiny portion of this was oil,” noted Irwin Kellner of Manufacturers Hanover Bank in New York, a one-time optimist who now sees trade and inflation problems pinching the economy considerably by next spring.

“With oil, the deficit was 12% worse,” he said. “Without oil, it was 11% worse. That’s a sizable deterioration in the (overall) trade deficit. It tells me the foreign currency market is going to be more active again, with a return to bearishness on the dollar, and that means inflation is not going to subside but get worse.”

‘Very Slow’ Improvement

Roger Brinner of Data Resources Inc., a Lexington, Mass., economic forecasting firm, said the report is “just another sign the trade improvement is going to be very slow.”

Brinner said his firm predicts that the trade deficit this year will be much the same as last year’s $156.2 billion under the new accounting procedure that corrects for underreported exports to Canada. Currently, the trade deficit is running at an annual rate of $163.9 billion.

Somewhat more sanguine, Michael Penzer of Bank of America, San Francisco, termed the May-June trade numbers a “temporary setback” in a gradually improving trend that he expects will resume. “We’ve seen patterns like this before, where you get a bad number or two because of the sheer volatility of these monthly reports.”

But Penzer speculated that the habit of buying European and Japanese products in a search for higher quality may have become so ingrained in Americans that import prices would have to go considerably higher--and the dollar somewhat lower--before the deficit can be decisively reversed.

Sees Declining Dollar

He said he expects to see the dollar declining gradually for several years--”but no nose dive.”

Continued strong U.S. demand for higher priced imports could cause inflation to rise later this year, but economists were pleased by the slight 0.2% increase in wholesale prices.

Brinner found the smaller-than-expected increase a sign that inflation will be “no worse than 5%” for the whole year. That still would be well above last year’s price record, when wholesale prices actually declined 2.3%.

But Kellner called the inflation increases expected later “the first step on the road to recession.”