Trade Deficit Dips Sharply to Lowest Level in 4 1/2 Years

The nation’s sometimes stubborn foreign trade deficit narrowed substantially in June to $8.17 billion--its lowest level since December, 1984--as Americans increased shipments abroad and imported less, the government reported Thursday.

The decline, which offset an unexpectedly sharp rise to $10.1 billion the previous month, put the trade deficit back on the path of slow-but-steady improvement that prevailed during the early part of the year. The deficit for April was $8.29 billion.

Cynthia Latta, an economist with DRI-McGraw Hill, a Cambridge, Mass., economic forecasting firm, said the figures bolstered predictions that the economy is headed for a “soft landing” rather than a recession, which might have been more likely had imports continued high.

Analysts had worried that continuation of an earlier import-buying spree by consumers would intensify inflationary pressures, eventually forcing the Federal Reserve Board to raise interest rates further--a move that could send the economy into a slump.

But William C. Melton, economist for IDS Financial Services in Minneapolis, said the June figures show that overall consumer spending is tapering off at just the right pace to avoid both inflationary pressures and a recession.

He noted that the decline in the trade deficit was significantly sharper than had been expected. “It’s really quite striking,” he said. “That is what you need to do on a continuing basis. If we can keep that up in coming months, we’ll end up OK.”

Even so, the lower-than-anticipated deficit figure caused financial markets to gyrate. The stock market surged early in the day, then fell after some investors began worrying that the trade figures suggested consumer spending was still too high. The dollar rose sharply worldwide.

Nevertheless, the Bush Administration expressed confidence that the decline would prove to be “good news for the country.” White House spokesman Marlin Fitzwater said that the increase in exports was “welcome, and the deficit is back on a downward course for the month of June.”

Increase in Exports

The report showed a hefty increase in U.S. exports, which rose $459.1 million, or 1.5%, to a record level of $30.91 billion in June. Imports fell sharply, declining $1.45 billion, or 3.6%, to $39.08 billion. Imports were $40.53 billion in May.

Economists said they were particularly encouraged that the gain in exports included a sharp increase in shipments of American-made capital goods, indicating that U.S. industrial products once again have become competitive in world markets.

The decline in import buying was spread across a wide range of goods, ranging from automobiles, parts and engines to capital goods, industrial supplies and foods. Purchases of foreign-made consumer goods were virtually unchanged from previous month’s levels.

William T. Archey, trade specialist for the U.S. Chamber of Commerce, said the figures “demonstrate that U.S. industry can compete effectively in the face of a stronger dollar.” Archey said that improved quality and cost controls had offset the impact of the dollar’s rise, which makes U.S. goods more expensive in foreign markets and imports more attractive at home.

Analysts Disagree

Still, analysts were divided over how rapidly--or how far--the trade deficit might fall from now on. Although some internal Administration forecasts show that the annual deficit could shrink below $100 billion this year, Melton predicts that it will stay in the $110 billion range.

The trade deficit for 1988 was $118.53 billion, down from a peak of $152.12 billion in 1987.

The June shrinkage in the trade deficit was aided by a drop in oil imports, reflecting declines in both prices and quantities of foreign oil purchased.

U.S. oil imports fell to 237.9 million barrels in June from 258.1 million barrels in May, and the average price dipped 73 cents per barrel. The nation’s oil import bill fell to $4.2 billion in June, from $4.75 billion in May. But some oil analysts are expecting imports to begin rising later this year, while domestic production is apt to fall.

Imbalance With Japan

As usual, the United States posted its largest single-nation trade deficit with Japan--an imbalance of $3.9 billion in June, down from $4.28 billion in May. By contrast, America ran a $44.5 million surplus with Europe, down from $109.4 million in May.

Economists had worried about the May increase in the trade deficit because it appeared to reflect a further rise in consumer spending, which in turn meant increased purchases of foreign imports. The United States lacks the production capacity to serve both markets at once.

Analysts had warned that unless import buying fell off visibly, the situation would produce shortages and could intensify pressures for price increases. With the June report, however, that seems far less likely.