Current Account Trade Deficit Dips 9.8% in Quarter

The deficit in the broadest measure of U.S. trade narrowed sharply from April through June as overseas sales of American merchandise surged to a record high, the government reported Tuesday.

However, the good news was tempered because America suffered its first deficit in three decades in the trade category, which includes investment earnings.

The Commerce Department said the deficit in the current account shrank to $33.3 billion in the second quarter, a 9.8% improvement from a first quarter imbalance of $36.9 billion. It was the biggest quarterly improvement since a 20.1% drop in the final three months of last year.

Rise in Exports Felt

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.

The improvement in the second quarter current account deficit occurred because the deficit in merchandise trade fell to $29.9 billion, down from $35.2 billion in the first quarter, as exports rose to a record level and imports posted the first quarterly decline in three years.

This improvement was offset by a $492-million imbalance in services, which meant that foreigners earned more on their investments during the quarter than Americans earned on overseas investments.

Also adding to the current account deficit was $2.9 billion in U.S. payments for foreign aid and pensions to Americans living overseas.

For the first six months of this year, the current account deficit has been running at an annual rate of $140.5 billion, a substantial improvement from a record deficit of $154 billion in 1987.

The improvement has come because of a boom in U.S. exports, reflecting declines in the value of the dollar since 1985 that have made American goods competitive once again on overseas markets.

The export rebound has translated into hefty job gains in American manufacturing, which the Reagan Administration hopes will benefit Vice President George Bush’s presidential chances.

However, Democrat Michael S. Dukakis has charged that the surge in trade deficits this decade and the resulting growth in foreign debt is one major failure of the Reagan economic program.

The current account was last in surplus in 1981, a year in which Americans’ earnings on overseas investments were enough to offset a deficit in merchandise trade.

First in 30 Years

Since that time, Americans have handed over billions of dollars to foreigners in exchange for imported goods, transforming the country from the world’s largest creditor nation to the world’s largest debtor country.

That means that foreigners now own more in U.S. investments than Americans hold in foreign investments.

This transfer of wealth was reflected in the second-quarter deficit in the services category, the first deficit in this category since 1958.

The services deficit is small enough that it could be revised away in future reports. Three months ago, the government said the services category posted a deficit of $655 million in the first quarter. That was revised in Tuesday’s report to show a surplus of $1.4 billion.

But economists said the trend is clear. With foreign holdings in the United States rising rapidly, the investment category will soon turn negative and will stay in the red for some time.

The congressional Joint Economic Committee held a hearing on the trade deficits Tuesday and heard a panel of economists urge further action to cut federal budget deficits as a way of slowing U.S. domestic demand and further reducing the trade deficit.

The current account deficit is directly linked to the growth of foreign ownership of U.S. assets because it shows how much we have borrowed from abroad to finance our trade deficit.

At the end of 1987, America’s net debtor position stood at $368.2 billion.

Reduced Living Standard

Nigel Gault, senior economist at Data Resources Inc., told the committee that he estimates America’s foreign debt burden will top $500 billion this year and will approach $2 trillion by the year 1995.

Economists have warned that as more and more money is transferred into foreign hands to service America’s debt, it will mean a lower standard of living for Americans.

“Our foreign debt is growing at the rate of approximately $200,000 per minute,” said Sen. Paul Sarbanes, (D-Md.) and chairman of the economic committee. “Our status as a debtor nation has profound implications for the domestic economy. It affects employment prospects, the financial markets, the value of the dollar and vital sectors of the economy, such as housing, which depend on long-term credit.”

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.

Today, the government will release a report on the merchandise trade deficit for July, with many economists predicting that the imbalance will decline slightly to $11.5 billion, down $1 billion from the June deficit.