$9.5-Billion Trade Deficit in July Marks 3 1/2-Year Low
The U.S. trade deficit narrowed to a 3 1/2-year low of $9.5 billion in July, the Commerce Department reported Wednesday, as imports fell sharply while exports continued to pour out of the nation’s factories at near-record levels.
The sharp improvement in the trade imbalance, down from a revised $13.2 billion in June, caught nearly all analysts by surprise, helping to send the dollar’s value up on currency markets and moderately lifting stock and bond markets.
The gain is also likely to be helpful to Vice President George Bush, who has been under attack in the presidential campaign by Democratic candidate Michael S. Dukakis on the charge that the large trade deficits under the Reagan Administration threaten the country’s prosperity.
In the past, a significant deterioration in the trade figures has often triggered sharp declines in financial markets. To the extent that he can avoid any market upsets just before the November election, Bush is probably in a better position to fend off Dukakis’ argument that the nation’s current economic gains are built on a shaky foundation.
American manufacturers are continuing to reap the benefits of renewed competitiveness and a lower greenback, boosting exports to $182 billion so far this year. That is up $40 billion and 28% above the levels reached in the same period in 1987.
And despite a relatively modest increase recently in the dollar’s value, which makes U.S. goods more expensive in foreign markets, American firms appear to be starting to recapture some of the markets they lost to foreign competitors earlier in the decade.
The big drop in imports primarily was caused by a decline in shipments of foreign production equipment and autos.
“Our exports continue to climb because our goods are cheaper,” said Jay Goldinger, an analyst with the Los Angeles investment firm Capital Insight, “and imports are declining because we have finally found a price high enough to stop consumers from buying imported goods.”
But analysts warned that U.S. manufacturing firms, in their efforts to meet the strong demand from both home and abroad, appear to be straining against the limits of their production capabilities.
“These recent figures are a double-edged sword,” said Steven Roach, an economist at Morgan Stanley, the New York investment house. “The sharp improvement in the trade gap, especially on the import side, is welcome news. But the down side is that with demand for U.S. goods remaining so strong, the potential for rising inflation remains very much on the scene.”
Indeed, the nation’s industrial production stood 5.3% higher in August than a year ago, the Federal Reserve reported Wednesday, but the rise slowed to a modest 0.2% gain last month after a blistering 1% increase in July.
President Reagan, in a campaign appearance for Bush in Cape Girardeau, Mo., hailed the trade report as “very good” news. “When America goes into the market to compete,” Reagan said, “we play to win.”
Even before the trade figures were released, Treasury Secretary-designate Nicholas F. Brady, whose nomination was confirmed Wednesday by the Senate on a 92-2 vote, predicted that the deficit would decline at a “surprisingly fast” pace over the next few months.
Annual Average Drops
For the first seven months of the year, the trade deficit has been running at an annual average of $137.5 billion, down nearly 20% from the record $170.3 billion last year.
Moreover, the trade gap started off the second half of 1988 with a sharp improvement from the monthly average of $11.1 billion for the April-June quarter. Adjusted for inflation, the gains this year have been even more significant, suggesting that robust trade should continue to provide much of the muscle for the economy’s better-than-expected performance recently.
July’s report reflected imports of $36 billion and exports of $26.5 billion. Imports were down nearly 9% from the previous month, but exports rose less than 1%.
With the release of the July report, the government resumed a practice dropped in 1979 of simultaneously reporting the import figures without including the cost of shipping and insurance.
New System Results
The July trade gap of $9.5 billion was computed under the old system. Under the new system, excluding the shipping and insurance costs with imports, the deficit for July fell to $8.1 billion from a June imbalance of $11.7 billion. Both numbers are adjusted for seasonal variations.
As usual, the nation had its biggest trade deficit with Japan, a $4.4-billion imbalance that was reported as unchanged from June. Country-by-country comparisons, however, do not reflect seasonal variations, and, because July is normally a poor month for U.S. exports, the gap with Japan probably improved.
Also failing to account for seasonal adjustments, the deficit with Western Europe showed a rise to $2.3 billion from $1.9 billion, while the deficit with Taiwan was unchanged at $1.2 billion and the gap with Canada was similarly unchanged at $1.1 billion. The trade gap with South Korea rose slightly to $900 million from $800 million.
Oil imports were not a significant factor in July’s trade improvement, dipping slightly to $3.4 billion.
