Trade Gap Falls; Dollar, Stocks Up : Deficit Dips to $12.2 Billion as Exports Boom; Inventory Rise Risks Slowdown

The U.S. trade deficit shrank further in December as the nation’s export boom continued to gain momentum, the Commerce Department reported Friday, dampening fears that November’s sharp improvement had been a fluke.

The December report put the deficit at $12.2 billion, down from $13.2 billion in November and $17.6 billion in October. The news buoyed the dollar on foreign exchange markets, but reaction in the stock market was more muted.

Separately, the department reported that businesses continued to pile up excess inventories in December, heightening the risk that the economy may slow significantly later this year. The report said that inventories grew 0.8% over the month, after increases of 0.9% in November and 1.1% in October.

Lower Deficit Hailed

The drop in the monthly trade deficit was hailed by the White House. “The clear downward trend indicates both deficits (budget and trade) are moving in the right direction--downward,” said presidential spokesman Marlin Fitzwater, who was traveling on Air Force One with the President to California.

Still, economists noted that imports had not declined, suggesting that further progress in reducing the trade deficit is likely to be slow.

With the December figures included, the trade deficit for all of 1987 reached a record $171.2 billion, up from $156.2 billion in 1986 and $133.7 billion in 1985. Most analysts expect it to fall to between $150 billion and $160 billion in 1988.

Following release of the report, the dollar rose in Tokyo to 131 yen, from 128 the day before. In Frankfurt, it advanced from 1.69 deutsche marks to 1.71. On Wall Street, the Dow Jones industrial average rose 21.72 points to 1,983.26.

At the same time, the Labor Department said that wholesale prices charged by producers rose 0.4% in January, reversing a decline of that size in the previous month. The increase, the first recorded since September, stemmed mainly from higher food prices.

The combination of reports kept economists divided over where the economy is headed. The Reagan Administration sought to emphasize the export boom. “We’re beginning to see our economy driven by exports, and that means economic vitality and increased jobs for Americans,” Commerce Secretary C. William Verity Jr. said.

Other analysts noted that the continued buildup of inventories at the retail level may cause businesses to cut back new orders, possibly leading to a slowdown in the economy later this year, despite the continued increase in exports.

Risk of Recession Seen

Sara Johnson, economist for Data Resources Inc., a Cambridge, Mass., economic forecasting firm, said that, although a recession still is not a certainty, the December inventory buildup “raises the risk” of one, particularly if consumers cut their spending significantly. “It’s a borderline case right now,” she said.

Friday’s figures left no doubt that the export boom has built up steam and revived the long-moribund manufacturing sector of the economy. Overall exports rose $1 billion, or 4.2%, in December to a monthly record of $24.8 billion. Shipments of manufactured goods totaled $16.1 billion during the month, almost as much as the healthy $16.2 billion recorded in November.

However, imports remained at just over $37 billion in December. The only major decline was in petroleum imports, and a good part of that reflected reductions in world oil prices.

Analysts were divided over whether imports would begin to decline sharply anytime soon. Irwin Kellner, chief economist for Manufacturers Hanover Trust Co. in New York, said he still expects imports to fall later this year as U.S. manufacturers begin to expand their domestic production capacity to enable them to serve domestic markets more effectively.

Jerry Jordan, a former Reagan Administration economist, now a senior vice president at First Interstate Bank in Los Angeles, said some of the current spate of import-buying reflects purchases by both American and foreign firms that are expanding their production facilities in the United States.

Dependent on Imports

However, Manufacturers Hanover’s Kellner cautioned that American consumers and businesses are far more dependent on imports than they used to be and getting them to switch to U.S. products will be a slow process. Many materials and components used by American manufacturers simply are not made in the United States anymore.

It was not clear how much political impact the new trade figures would have. Although a sharp rise in the deficit might have intensified pressure in Congress to enact tough trade legislation, analysts say that the decline has not been sharp enough to cool protectionist sentiment significantly. “It’s still a very large number,” one Administration official conceded.

The 0.4% increase in wholesale prices of finished goods was not regarded as particularly troublesome. Wholesale prices had been declining for the three previous months and had been rising relatively modestly through most of 1987.

Prices Stable

Moreover, prices of goods and materials at earlier stages of the manufacturing process were also relatively stable, suggesting that there will be little pressure for price increases later.

The report on inventories showed that stockpiling by manufacturers and retailers rose to $701.9 billion in December, following adjustment to reflect seasonal patterns, from $696.4 billion the previous month.