U.S. Merchandise Trade Deficit Shrinks to Lowest Level in 5 Years

The nation’s foreign trade deficit shrank significantly in July for the second month in a row, the government reported Friday, allaying earlier fears that a three-year run of improvement in the merchandise trade picture might be stalling out.

Commerce Department figures showed that U.S. imports in July exceeded exports by $7.58 billion, down from a revised deficit of $8 billion in June and the smallest monthly trade deficit recorded since December, 1984.

What is more, the improvement was due mostly to a drop in imports, which fell by $976 million, or 2.5%, to $38.3 billion. Although exports also declined by $801 million, or 2.6%, they remained at a relatively robust level of $30.7 billion.

The continued improvement in the trade picture surprised the financial markets and some economists who had been expecting the deficit to widen in July--to as much as $9 billion--in the face of the recent rise in the value of the dollar.

After release of the July figures, currency markets rallied briefly on Friday. The dollar soared initially on foreign exchange markets and the stock market surged briefly. In both cases, however, the gains tapered off later in the day.

Economists were buoyant about the new trade report. Allen Sinai of Boston Co. Economic Advisors, an economic consulting firm, called it “just what the doctor might have ordered. . . . It is very encouraging.”

David Wyss, economist with DRI-McGraw-Hill, a Lexington, Mass., forecasting firm, also was encouraged. “We appear to be closing the gap faster than expected,” he said.

Analysts generally attributed the continued improvement to three factors:

- Slowing of the U.S. economy has reduced demand so that Americans are buying fewer foreign goods. Economists had feared that a continued consumption boom in the United States would make the trade imbalance impossible to pare back.

- Robust economic growth in West Germany, Japan and other nations has kept markets for U.S. exports, particularly for manufactured goods, healthy. And American firms have become more competitive by cutting back costs and holding down wage increases.

- Although the dollar’s recent rise eventually will make American goods less competitive abroad, initially it reduces the value of imports because it takes fewer dollars to buy the same volume of goods. Later, the volume of imports may start to rise.

The report on the merchandise trade deficit Friday came three days after the Commerce Department announced that the broadest measure of U.S. trade--the current account, which includes factors such as tourism and investment flows as well as merchandise trade--showed a deficit of $30.99 billion for the second quarter of 1989, a slight widening of the gap. Most significantly, the current account figures showed that for the first time since the 1950s, foreign investors are earning more from assets in this country than Americans are receiving on their investments abroad.

The July figures on merchandise trade called into question some analysts’ assertions that the United States must further devalue the dollar if it is to bring about any additional narrowing of the overall foreign trade deficit.

William Archey, trade specialist for the U.S. Chamber of Commerce, said the figures show that improved competitiveness on the part of American exporters is “defying the orthodox view on that subject.” He said U.S. firms are able to sell abroad even with a rising dollar.

The July trade figures came as a relief to most analysts, who had feared that a sharp worsening of the trade deficit in May might have meant that improvement in the trade picture was “stalling out.”

Particularly encouraging, they said, was the fact that shipping of capital goods abroad remained buoyant, rising by $400 million in July, during the overall drop in exports. Imports of petroleum rose $100 million in July, but that was decidedly less than what had been expected.

In hindsight, analysts said, the widening of the trade gap in May appears to have been an aberration, and the economy now seems poised for the kind of “soft landing”--a gentle slowing without recession--for which policy-makers have been hoping.

While economists are generally optimistic for the near term, they are divided over how long the trade deficit will continue to narrow.

Most analysts said they expect the trade deficit to shrink to between $90 billion and $100 billion for all of this year--from $118.5 billion in 1988 and a peak of $152.1 billion in 1987.