Trade Deficit Drops 9.8% in 2nd Quarter : But U.S. Suffers $492-Million Setback in Services Category

The deficit in the broadest measure of U.S. trade narrowed dramatically from April through June as overseas sales of American merchandise surged to a record high. However, the good news was tempered by the fact that the nation suffered its first deficit in three decades in the category that includes investment earnings.

The Commerce Department said the deficit in the current account shrank by 9.8% in the second quarter, falling to $33.3 billion, compared to a first-quarter imbalance of $36.9 billion.

It was the sharpest narrowing of the deficit since a 20.1% drop in the fourth quarter of 1987.

Important Data

The current account is the most important of all the government’s trade statistics because it covers not only trade in merchandise but also trade in services, which primarily reflect the flow of investment earnings between countries.

For 16 of the last 17 years, the country has run deficits in the merchandise trade category. But the current account registered a surplus as recently as 1981 because Americans’ earnings on overseas investments were enough to offset the merchandise trade deficits.

In this decade, however, Americans have handed over billions of dollars to foreigners in exchange for imported goods, transforming the country from the world’s largest creditor nation, a distinction it held in 1982, to the world’s largest debtor nation.

That means that foreigners now own more in U.S. investments than Americans hold in foreign investments. At the end of 1987, America’s net debt had grown to $368.2 billion.

Services Deficit

Reflecting that transfer of wealth, the government reported today that the country suffered a $492-million deficit in the services category, which tracks the flow of investment earnings. It was the first deficit in this category since 1958.

The deficit in services was a small one and could very well be revised away in future reports. In fact, the government three months ago reported that services posted a deficit of $655 million in the first quarter. That was changed in today’s report, however, to show a $1.4-billion surplus.

Still, economists say the day is not far away when services will tumble into a deficit and stay there for some time as more and more American wealth will have to be transferred overseas to service foreign investment in this country.

Many economists have warned that the debt service burden will eventually lower Americans’ standard of living by reducing the amount of funds available in this country for government operations, business investment and individual consumption.

Democratic presidential candidate Michael S. Dukakis has made the country’s growing debt burden an issue in the presidential campaign, branding it a major failure of President Reagan’s economic policies.

The Administration, however, has played down the significance of the record increase in foreign investment in this country, contending that the debt servicing is still a tiny fraction of the country’s overall gross national product.

In the second quarter, the drop in the current account deficit reflected a huge decline in the merchandise trade category.