Trade Deficit Up Sharply to $12.5 Billion : Consumers Resume Import Binge While Exports Dip Slightly
The nation’s foreign trade deficit widened abruptly in June, the government reported Tuesday, suggesting that improvement in the nation’s trade picture may well come more slowly from now on.
The June increase, to $12.5 billion, offset much-heralded good news in May, when the trade deficit shrank to a revised $9.8 billion, its lowest level since December, 1984. The June figure was the worst since last February, when the deficit stood at $14.4 billion.
The reversal showed up across the board, as consumers renewed their appetite for imports in the face of a continuing domestic economic boom, and manufacturers bought more imported capital goods to increase their ability to meet higher demand both at home and abroad.
Export Figures Erratic
At the same time, exports declined slightly, after a sizable increase in May. However, analysts said that export figures frequently are erratic and that they expect U.S. shipments abroad to increase again in July.
Allen Sinai, chief economist for the Boston Co. investment firm, said the figures show that the trade deficit will be difficult to reduce as long as the economy is expanding so rapidly that America is consuming much more than it currently is able to produce at home.
“We’ve skimmed the cream off the top of the trade turnaround,” Sinai said. “It’s going to be tough to improve much from current levels unless the economy here slows down sharply or else the dollar falls a lot further. We’re probably stuck in the $11-billion to $12.5-billion range for some number of months.”
Sinai and other economists have begun to worry that the strength of the domestic economy may be impeding progress on reducing the trade deficit and adding to inflationary pressures as well. With exports now more competitive be cause of the lower dollar and with domestic demand continuing high, many factories simply are unable to produce enough to fill all of their orders. As a result, prices have begun to increase more rapidly, and Americans are filling the gap from abroad.
Underscoring the problem, the Federal Reserve Board reported that American factories were operating at an average of 83.5% of their capacity in July, the highest level in four years.
On Monday, the board reported that industrial production rose 0.8% in July, suggesting that the economy may be overheating. Last week, the Fed raised its discount rate--the interest it charges financial institutions for borrowings--by half a percentage point, to 6.5%, to help cool the economy down.
Lower Deficit for Year
Despite all the gloom, analysts still expect the United States to pare its trade deficit to about $130 billion this year, down from $170.3 billion in 1987.
Ben E. Layden, a partner in Maryland Capital Management, a Washington-area consulting firm, predicted that trade reports would “still show a favorable trend” but “at a slower rate of improvement than we were seeing.”
The monthly trade deficit hit a peak of $15.6 billion in October and has been declining rapidly ever since. “Expectations had been running a little ahead of reality,” Layden said Tuesday.
Financial markets in the United States and around the world posted a mixed reaction to the figures. The stock and bond markets plunged initially, and the dollar plummeted on the foreign exchange markets. But all three recovered later after traders digested the information more thoroughly.
Needs a Second Look
Jay Goldinger, chief economist at Capital Insight Inc. in Beverly Hills, said that the report was “one of those cases where the second look is brighter than the first look . . . . The sprinter has to come to something of a rest, that’s all.”
In New Orleans, where Republicans were preparing to nominate Vice President George Bush for President, the trade figures, along with increasing worry about a revival in inflation pressures, probably were bad news. Sinai said that the new numbers should be “justifiable ammunition for the Democrats and . . . (un)pleasant reading for the Republicans.”
Indeed, almost immediately after the trade figures were published Tuesday, Democratic presidential nominee Michael S. Dukakis seized on the trade and inflation issues, contending that the resulting tightening by the Fed will “make it impossible for some 4 million young people to buy their first homes.”
Dukakis Cites Deficit
Dukakis said that the “fundamental mistake” of Reagan’s two terms was “that there was no effort to bring the deficit down.” His reference was to the huge federal budget deficit, which some analysts say helps keep interest rates high by increasing federal borrowing.
The Reagan Administration predictably had a muted reaction to the figures. Commerce Secretary C. William Verity Jr., who usually trumpets the improvement when the trade deficit narrows much, issued a terse statement Tuesday saying that the “underlying trend . . . remains favorable” when calculated on a quarterly basis.
Tuesday’s statistics contained one decided bright spot: Imports of capital goods rose sharply, suggesting that American firms are continuing to invest in equipment to increase their production capacity. Until recently, many U.S. firms had been reluctant to expand their production facilities for fear that the dollar would rise again and their export markets would collapse.
The Commerce Department figures showed that imports in June rose $2.7 billion, or 5.9%, to a new record of $39.4 billion, as exports fell $700 million, or 2.5%, to $26.8 billion. Exports had been exploding for the first five months of 1988 as the impact of the declining dollar made American goods more competitive abroad. All figures are adjusted to compensate for seasonal patterns.
William Archey, a former Reagan Administration trade official and now a trade expert for the U.S. Chamber of Commerce, said that the best way to fight the trade deficit now is to stop the overheating in the economy and to increase production capacity here at home.
