Economists Optimistic as U.S. Trade Balance Improves
The merchandise trade deficit declined slightly to $15.7 billion in August, the first monthly improvement in the nation’s trade outlook since March, the Commerce Department reported Wednesday.
The decline from July’s record $16.5-billion deficit came as encouraging news for most economists, who said that it reflects a slow, steady improvement of the nation’s trade balance in inflation-adjusted terms that has been under way for just over a year. While the monthly trade gap figures have risen in actual dollars in recent months, the adjustment for inflation has shown a generally favorable trend.
Nevertheless, financial and exchange markets, where traders and investors were hoping for a deficit as low as $14.5 billion, reacted with dismay to the August report. Long-term interest rates soared above 10%, the dollar declined further against foreign currencies and the Dow Jones average of 30 industrials plummeted a record 95.46 points.
But economists found reason for optimism in a sharp $1.4-billion drop in imports and noted that a small decline in U.S.-manufactured exports was caused almost entirely by the volatile category of aircraft and aircraft parts.
Further, they noted, the chronic deficits with the nation’s main trading partners in Western Europe and Japan showed a rare decline.
“When you have supersensitive markets that ignore the good news--the improvement in trade gaps with main partners, the continued improvement in real terms--and react negatively to any disappointment, then you’ll end up seeing the economy jeopardized by higher interest rates,” said John O. Wilson, senior vice president and chief economist at Bank of America in San Francisco.
Wilson projected that the total deficit in trade of goods and services, calculated in 1982 dollars, will improve from $145.8 billion last year to about $122 billion this year and $90 billion in 1988.
“When you really look at the trade situation from a longer view, instead of one month’s unadjusted data, you see trade is improving significantly in an economy experiencing export-led growth, and real economic improvement relative to Europe and Japan,” he said.
Economists blamed the trade deficit rise in the early summer months in part on the decision of the Commerce Department to stop making seasonal adjustments because its raw statistics have been increasingly unreliable. Thus, trade estimates during heavy importing months--normally June, July and to a lesser extent August--have soared well above monthly averages for the rest of the year.
Also, said Cynthia Latta of Data Resources Inc., a Lexington, Mass., economic forecasting firm, the markets had assumed that the $4.6 billion in oil imports in July would revert back to the $3.5-billion monthly average earlier in the year. Instead, oil imports were $4.7 billion.
Expecting a smaller fuel bill is probably unrealistic any time soon, since the oil price declines of a year ago are unlikely to be repeated, Latta said. “Instead, we’ll have to cut back on imports of manufactured goods--and in August we did just that,” she said.
Allen Sinai, chief economist at Shearson Lehman Bros. investment firm in New York, heralded the drop in manufactured goods imports as “very widespread and across the board.” It brought that category back to $26.9 billion, a level not seen since May, after June and July peaks of over $28 billion.
But Sinai noted that much more improvement is needed. “The big picture remains that this year will run a merchandise trade deficit of about $175 billion. That presents tremendous potential problems for the dollar, so the markets are all viewing this result as very negative.”
The deficit with Western Europe fell substantially, from $3.9 billion to $2.5 billion, and with Japan it fell more moderately from $5.1 billion to $4.9 billion. The deficit with Canada was up by nearly $300 million, but many manufactured imports from Canada are made by U.S.-owned companies. Deficits with oil exporting countries, and with the aggressive traders in the Pacific Basin, were either unchanged or slightly higher.
