Trade Deficit Surges to $10.77 Billion

After trending down for two months, America’s foreign trade deficit ballooned unexpectedly to $10.77 billion in August as imports of foreign goods surged and exports remained flat, the Commerce Department reported Tuesday.

The August merchandise trade deficit compares to a revised shortfall of $8.24 billion in July. The deficit for July originally had been pegged at $7.58 billion, the lowest in several years.

The August increase was paced by a $1.3-billion surge in imports of capital goods, which accounted for more than half of the $2.5-billion increase in overall imports. Exports dropped a scant $61 million to a seasonally adjusted level of $30.4 billion.

The report came as a shock to the nation’s financial markets. While some economists had quietly warned of a return to bigger trade deficits, market analysts had expected an August figure of about $9 billion.

Wall Street greeted the report with wild gyrations, with the Dow Jones industrial average plummeting more than 60 points in morning trading before recovering to close down 18.65 for the day.

Despite the bigger deficit, some observers see the gain in capital goods imports as a favorable long-term trend.

Commerce Secretary Robert A. Mosbacher, acknowledging that the report was worse than expected, noted that the increase was “primarily due to higher purchases of capital goods, which are used to produce other goods. This increase supports growing capacity in the manufacturing sector.”

“The increase in imports was a surprise,” said Lynn Reaser, an economist with First Interstate Bancorp in Los Angeles, “but the favorable part was that it was mostly capital goods, not consumer goods. That should help improve our productive capacity and reduce future reliance on imports.”

Cynthia Latta, an economist with Data Resources Inc., said that an unpublished computer analysis by the Lexington, Mass., forecasting firm had predicted a trade deficit of more than $10 billion after the more favorable June and July reports.

August, Latta said, “wasn’t really such a disaster, because it came after two unusually small monthly deficits that didn’t really set a trend but did get a lot of people excited. But you should notice that half the deterioration was capital goods imports and productivity gains in manufacturing have been very good.”

But Giulio Martini of Sanford C. Bernstein & Co. in New York said he sees the continued import boom in capital goods as further evidence that “foreign capital goods are displacing American goods and that there is still a serious competitiveness problem.” That problem, he said, could lead to shrinking growth, more inflation and higher interest rates in the near term.

First Interstate’s Reaser added, however, that high levels of imported goods are not bad in themselves.

“We want to be competitive in all markets, but just because we are importing more from countries with competitive advantage doesn’t necessarily mean we’re in a worse situation,” she said. “What I view with greater concern than the growth in imports is the fact that exports seem to be plateauing.”

The July trade figures, while encouraging on the surface, had worried some analysts because the lower deficit was caused almost entirely by a drop in imports. That, in turn, denoted slower economic activity.

Economists generally agreed that the persistently stronger dollar over the past year or more has begun to hurt U.S. exports while making imports relatively cheaper.

For the first eight months of 1989, exports have increased 14.3% over the same period in 1988. Imports have increased by 8.7% over the same period.

In a separate report Tuesday, the Federal Reserve Board said that industrial production edged down 0.1% in September. It was the first production decline since a 0.2% drop last February.

Since U.S. manufacturing growth over most of the past year has been paced by exports of manufactured goods, the Fed report could be a harbinger of future export weakness and slower economic growth overall.

The Fed, noting that the decline was led by a steep drop in output of trucks, basic metals and construction supplies, reported that the operating rate of the nation’s plants, utilities, mines and oil fields dropped by 0.2 percentage points to 83.6%.

That continued a gradual retreat from an 84%-plus capacity utilization rate that earlier this year had raised fears of recession-inducing inflation.