Little Effect on Financial Markets : U.S. Reports a Modest Decline in Trade Deficit
The nation’s trade deficit continued to shrink in October, the Commerce Department reported Wednesday, but the modest decline to $10.3 billion suggested that further gains will be slower in coming.
The deficit has fallen sharply from a peak of $15.6 billion last October and hit a low of $9.5 billion in July, but there has been little additional narrowing of the trade gap over the past few months. The September trade deficit was $10.7 billion.
“The easy gains are over,” said Cynthia Latta, a senior economist at Data Resources Inc. in Lexington, Mass. “We should see further improvement, but it won’t be as dramatic as in the last year.”
A separate measure of the trade gap, which will be used exclusively starting with data generated by the Customs Service next year, put the deficit at $8.9 billion in October, down from $9.2 billion the previous month. The more accurate figure, designed to be consistent with the way other nations report foreign trade, does not include freight and insurance charges incurred outside the United States.
Investors in financial markets, who sometimes have reacted strongly to disappointing trade figures, generally shrugged off the latest report because it was close to analysts’ expectations. The dollar was lower in currency markets, while stocks and bonds drifted lower on fears that interest rates were heading up.
The trade data, which suggested that the demand for imported goods remains at high levels, came amid other reports Wednesday on industrial production and business inventories that produced more evidence that the economy is plowing ahead at a rapid pace.
Strong growth at a time of relatively low unemployment heightens fears of rising inflation and is likely to prod the Federal Reserve, which met this week to discuss monetary policy, to push up short-term interest rates in an effort to rein in excessive growth.
“It looks like full speed ahead,” said David Jones, an analyst with Aubrey G. Lanston & Co. in New York. “Growth prospects are strong for at least the first half of next year.”
Indeed, Data Resources’ Latta argued, the economy may be “too strong for its own good.”
The prospect of a strong domestic expansion in the United States, but relatively modest improvement recently in narrowing the trade gap, heightens the policy dilemma facing the central bank.
“The Fed wants to raise interest rates to slow the economy,” said David Hale, chief economist for Kemper Financial Services in Chicago, “but if they raise interest rates, they (run the risk of) pushing the dollar up, which can exacerbate the deficit.”
The U.S. trade fronts appeared to be in a holding position in October. Adjusted for expected seasonal variations, imports fell modestly by about $600 million to $38 billion, but exports, which have been advancing by leaps and bounds for most of the year, also dropped slightly by about $300 million to $27.7 billion.
Despite the small setback in exports, U.S. foreign sales remained near record high levels. For the first 10 months of the year, exports were 28% above the same period in 1987.
Through October, the overall merchandise trade deficit has been running at an annual rate of about $136 billion, about one-fifth lower than the unprecedented imbalance between imports and exports of $170.3 billion last year.
The Reagan Administration portrayed the latest trade figures as further evidence that its economic policies are working. U.S. Trade Representative Clayton K. Yeutter, who was nominated Wednesday by President-elect George Bush to be his new agriculture secretary, told reporters that the October report “was not bad . . . good news on which to close out 1988.”
More Imports From Japan
But C. William Verity Jr., head of the Commerce Department, conceded that “while the trend continues to be favorable, our trade deficit is still very large.”
The trade report highlighted one potential sore spot by pointing to a surge of imports from Japan in October. Although the country-by-country figures are not seasonally adjusted, the trade gap with Japan widened by $1.4 billion to $5.5 billion as imports swelled to $8.7 billion from $7.3 billion in September.
Imports to the United States normally rise sharply in October to meet Christmas shopping demands but the higher deficit with Japan was in sharp contrast to a smaller trade gap with Asia’s newly industrial countries such as South Korea and Taiwan. The U.S. trade deficit with Western Europe rose by a much more modest $270 million to $1.1 billion.
Until very recently, Japan’s overall trade surplus had been shrinking because of a rapid rise in imports from the rest of the world. That had helped ease tensions between Japan and its leading trading partners. But if Japan’s surplus starts to widen again, it could rekindle protectionist pressures in the United States and elsewhere toward Japanese products.
Times staff writer Art Pine contributed to this story.
