U.S. Trade Deficit Second-Worst in History

The deficit in the broadest measure of U.S. foreign trade increased to $152.92 billion last year, the second-worst performance in history, the Commerce Department reported Tuesday.

But many private economists were encouraged by signs that better days may be ahead.

The Commerce Department said the 1.1% rise in the current-account deficit reflects a huge jump in the imbalance in goods, which climbed to an all-time high, and a second straight annual shortfall in investment earnings.

The current account is considered the broadest gauge of a country’s trade performance because it measures not only trade in goods and services, but also investment flows between countries and foreign aid.

Last year marked the fourth straight year that the U.S. current-account deficit widened. It was the worst performance since the record-high $166.3 billion in 1987.

By contrast, Japan, the world’s second-largest economy, had a huge surplus of $110.44 billion in its current account last year.

A separate Commerce Department report Tuesday shows that U.S. wholesalers’ inventories increased more than expected in January as sales dropped for the first time since July.

The 0.7% increase in inventories could be a sign of economic weakness tied to lagging orders. Still, analysts said, the buildup is more likely a result of delays in shipments of goods because of harsh winter weather during January.

Although the annual U.S. trade deficit was larger than a 1994 imbalance of $151.3 billion, the government said the imbalance for the final three months of 1995 shrank to $31.07 billion, 22.8% below the third-quarter figure.

Many economists viewed that improvement as an encouraging sign that America’s trade deficit may finally start to improve this year.

“The fourth-quarter improvement was spectacular. The current-account deficit is on a downward trend,” said Allen Sinai, chief global economist at Lehman Bros. in New York.

He predicted the deficit could narrow to $120 billion this year as economic growth picks up in America’s major export markets: Canada, Japan, Mexico and Europe.

The U.S. trade performance has become a key issue in the presidential campaign, with various Republican candidates using the rising deficits to attack President Clinton’s record on trade. GOP candidate Patrick J. Buchanan has said he would pull the country out of a global trade agreement and the free-trade deal with Mexico and Canada to save millions of U.S. jobs.

The administration, however, has blamed the worsening deficit on bigger economic forces--the U.S. economy has been growing faster and pushing up demand for foreign products--and insisted that the recent trends point to lower deficits in coming years.

This view is supported by many economists, but some are not so sure.

“The fourth quarter did show a lot of improvement, but the question is how sustainable that is,” said Larry Chimerine, chief economist at the Economic Strategy Institute in Washington. “Many of our best foreign markets, such as Mexico, are still struggling.”

Chimerine said he believes the current-account deficit will remain stuck about where it is for some time. He said his pessimism is based partly on a forecast that the deficit in investment income will continue to grow, reflecting that the United States is now the world’s largest debtor country.

In a reflection of this fact, foreigners earned $11.4 billion more on their U.S. investments than Americans earned on their overseas holdings, the second straight year the investment flow has been negative.

Direct investment by foreigners, defined as at least 10% ownership of a company, jumped 50% last year to a record $74.7 billion.