October Trade Gap Hits Record $17.6 Billion
The nation’s merchandise trade deficit ballooned to a record $17.6 billion in October, the Commerce Department reported Thursday.
The October figure easily surpassed July’s $16.5-billion deficit, previously the highest ever. It marked a huge 25% increase over September and was nearly $2 billion above the most dire predictions of market analysts.
The report immediately sent the dollar to new lows against the yen and Deutschmark and provoked frantic interventions by major central banks, including the Federal Reserve, while financial markets around the world suffered another day of steep plunges and partial recoveries. The Dow Jones, after a day of wild swings, closed down 47.08 points. (Details in Business.)
Small Rise in Oil Imports
Contrary to earlier expectations among Wall Street analysts, October’s huge $4.3-billion surge in imports over September was not primarily caused by an expected seasonal increase in oil imports. The causes were much more basic: a $3.3-billion increase in high-cost, high-value manufactured goods from Europe and Japan, primarily passenger cars, telecommunications and office equipment and electrical and power-generating machinery. Oil imports were up only $400 million.
Deficits with virtually every U.S. trading partner increased markedly, primarily with Japan (up $1.3 billion to $5.9 billion) and Western Europe (up $1.3 billion to $3 billion).
There were few bright spots. U.S. exports continued their string of monthly advances, unbroken since mid-1986, but the expansion was a small $800 million, or 3.7%. In contrast, imports increased 12.7%.
Because the consensus of market analysts before the Commerce report was that any deficit over $15 billion would be bad news, reaction was predictably glum.
White House spokesman B. Jay Cooper called the report disappointing but noted that the monthly Commerce reports are subject to revision. He added that the declining dollar, which has helped improve the volume of U.S. exports, has diminished their dollar value in the monthly reports while augmenting the dollar value of imports.
“It’s like another earthquake, economically,” said Jay Goldinger, a foreign currency specialist at Cantor Fitzgerald & Co., a Los Angeles bond house. “It looks like importers are stockpiling in anticipation of a weakening dollar and protectionist trade legislation. The world sees that Washington has no policy on the dollar, that the dollar must be lower because Washington doesn’t care, so business is importing because it assumes we’re going to have a protectionist trade bill.”
‘A Sunset Economy’
House Speaker Jim Wright (D-Tex.) declared: “For years, we’ve listened to the Reagan Administration tell us not to worry about a few ‘sunset industries.’ But the worsening trade figures and the declining dollar raise the specter of something even more troubling--a sunset economy for America.”
Jerry J. Jasinowski, chief economist for the National Assn. of Manufacturers, called the report “dreadful . . . dismal” and explained that the grim October trade performance “reflects a surge in (the value of) imports . . . due to higher import prices” and also “American business stockpiling imports to hedge against a further decline in the dollar.”
Cynthia Latta of Data Resources Inc. in Lexington, Mass., also believes that imports are being hoarded to beat further dollar declines. But she said that the large increase in car imports, especially from Europe, presumably ordered last summer when the stock market was at its height, possibly means there is an excess inventory of luxury cars.
BMWs ‘Not Selling Well’
“It’s the Mercedes and BMWs that are not selling well now,” Latta said--a point borne out in recent statistics showing that November sales of car and truck imports declined while domestic cars sold reasonably well. “So, from that point of view, it may not be quite so disastrous after all. Seasonal factors would have dictated a rise anyhow in all imports before the Christmas buying season.”
But Latta added: “What concerns the market place is that the volume of dollars going abroad to buy goods just won’t shrink. Our exports are doing well, but a lot of that huge outflow of dollars in the hands of foreigners is ending up in foreign exchange markets, driving down the dollar’s value, rather than in return for American goods. You wonder how cheap American goods have to be before they offset a reputation of not great quality. You don’t overcome that easily.”
Irwin L. Kellner, chief economist at Manufacturers Hanover Bank in New York, agreed that the perceived inferior quality of many U.S. products is a major problem. “Why is it that people are buying a Honda Acura for $29,000 and passing up a Cadillac Fleetwood at $25,000?” he asked.
But Kellner pointed out that the dollar’s decline, measured against all U.S. trading partners instead of against just Japan, Canada and Western Europe, has been relatively small. According to Manufacturers Hanover’s calculations, since its February, 1985, peak the dollar has fallen only 14% against the 18 currencies that represent 80% of all U.S. trade.
Dollar Drop Called Small
“After inflation, the drop is only 4.3%, so, even if the dollar is down 50% against the mark and the yen, that’s not all there is,” Kellner said. “The dollar has not fallen enough against all trading currencies.”
To Donald Straszheim, economist at Merrill Lynch in New York, it is more a matter of domestic fiscal policies and spending habits than the dollar’s current level. “It’s increasingly clear that we’re not going to get imports down until we reduce domestic demand,” he said. “How do we do that without a recession? I don’t know.”
In a longer term view, Straszheim added: “The key point here is the migration of our trade problems from Europe and Japan to Korea, Taiwan and the other newly emerging industrial countries. The real issue now is the import of goods from those low-wage countries, and that brings into question the strategy of a low dollar against the yen and the mark. If you do that and then turn around and import Korean cars, what good does it do?”
Indeed, the U.S. trade deficit with Taiwan is running at $16.7 billion so far this year, trailing only Japan ($50.2 billion) and Western Europe ($25.1 billion). In all, the U.S. trade deficit is $145.8 billion for the year, compared to $138.2 billion for the first 10 months of 1986 and $156.2 for all of last year.
