Stocks Plunge 101 as Trade Gap Rises : Unexpected Hike Pushes Interest Up, Dollar Down

In a report that rocked financial markets around the world, the Commerce Department disclosed Thursday that the monthly U.S. trade deficit swelled by $1.4 billion to $13.8 billion in February.

Stock prices plummeted and interest rates soared on Wall Street, and the value of the dollar plunged on international currency markets. (Details in Business.)

“This is Disasterville for the markets,” said John Paulus, chief economist at Morgan Stanley, a New York investment firm. “Under this kind of pressure, the dollar is going to have to fall appreciably.”

Although U.S. exports continued to rise, expanding by $1.2 billion in February to $23.6 billion, the increase was swamped by a surge of foreign goods that sent imports up $2.6 billion to $37.4 billion.

Had Expected Decline

Most analysts had expected the trade deficit to fall at least $1 billion from January’s $12.4 billion, primarily because normal seasonal factors during February usually produce a substantial improvement in U.S. exports and a modest slowdown in imports.

But, when the figures indicated that the trade gap had widened instead, currency traders around the globe quickly dumped dollars out of fear that the greenback still had not fallen far enough to help bring the U.S. trade deficit under control.

A declining dollar eventually is supposed to narrow the trade deficit by making foreign goods more expensive in the United States and American products cheaper abroad. But it is difficult to staunch the flow of imports as long as spending remains robust in the United States.

“Ironically, the root of the trade problem is that the American consumer is coming back,” said David Wyss, a senior economist at Data Resources Inc. in Lexington, Mass. “Investors are convinced that Americans must stop spending so much on foreign goods; and, if they won’t cut back on their own, the markets are going to try to do it for them.”

Economists cautioned, however, against reading too much significance into the notoriously volatile trade figures. “In terms of substance, you can’t draw any firm conclusions from one month’s numbers,” said Ira Kaminow, chief economist at the Government Research Corp. here. “Despite this (increase), there’s no doubt that the trade deficit is still heading down.”

Figures Called Erratic

The Reagan Administration tried to divert attention from the disappointing trade report.

“Monthly trade figures are by their nature erratic,” Treasury Secretary James A. Baker III told the policy-making group of the International Monetary Fund. “What is important is that we are continuing along the general path of reduced (trade) imbalances. Exports continued their very strong performance; they are 22% higher than a year ago and growing at double the rate of imports.”

White House spokesman Marlin Fitzwater acknowledged that “the overall report is discouraging in the sense that it went up instead of down.” But he pointed out that “the average trade deficit for January and February is $1.2 billion less than the average for the fourth quarter of 1987.”

West German Finance Minister Gerhard Stoltenberg also played down the significance of the one-month surge in the U.S. trade deficit, which was disclosed only one day after top economic officials from the seven leading industrial democracies again vowed to work together in their efforts to stabilize the dollar.

No Change in Trend Seen

“It is a monthly figure,” Stoltenberg said. “We do not expect that it will change the basic trend.”

Nonetheless, most private analysts could find little to cheer about in the February trade figures.

Data Resources’ Wyss predicted that the Federal Reserve Board, in an effort to prop up the value of the dollar, would force up interest rates in the United States, thus making investments in this country more attractive but also jeopardizing economic growth.

“And it shows that not only are American consumers hooked on foreign goods but also that (foreign exporters) are so hooked on the U.S. market that the withdrawal is going to be very painful for everybody,” Wyss said.

In the generally gloomy trade picture, however, some analysts found at least one ray of sunlight. The surge in imports was concentrated among such products as auto parts, power-generating machinery and electrical machinery rather than consumer goods.

Rise in Capital Goods

“There is some evidence that the rebuilding of the American economy is picking up steam,” said David Hale, chief economist at Kemper Financial Services in Chicago. “Most of the growth in exports appeared to be in capital goods rather than consumer items. That will help U.S. industry turn out more goods in the long run. But, for now, it just makes the trade deficit much, much worse.”

The U.S. trade gap with Japan widened by nearly $600 million, rising to $4.5 billion; worsened against Canada by nearly $350 million, to $1.5 billion, and deteriorated with Western Europe by $230 million, to $1.6 billion. The trade gap with the Organization of Petroleum Exporting Countries also worsened, from $1 billion to $1.3 billion.

The trade deficit with the newly industrialized East Asian nations of South Korea, Taiwan, Hong Kong and Singapore remained at about $2.9 billion.