Nation’s Trade Deficit Dives 9% in June; Fed Leaves Interest Rates Alone

The nation’s deteriorating foreign trade deficit shrank abruptly in June for the first time in five months, the government reported Tuesday, but analysts said it is too early to tell whether the impact of the Asian economic slump may finally be abating.

Commerce Department figures show that Americans bought $14.15 billion more from abroad than they sold to other countries in June--down about 9% from a revised $15.5-billion trade deficit in the previous month and well below the $15.8 billion that analysts had expected.

However, the improvement stemmed largely from a drop in the price of oil imports and a falloff in auto purchases, which sent import levels down more rapidly than exports. U.S. exports to so-called emerging-market countries in Asia continued to slump in June.

At the same time, the Labor Department reported separately that inflation remained tame in July, continuing the strong performance that has prevailed for the last several months. The consumer price index rose 0.2% last month, following a rise of 0.1% in June.

In a move that reflected both those trends, the Federal Reserve’s policy-setting Federal Open Market Committee voted Tuesday to leave interest rates unchanged despite worries by some policymakers that inflation pressures may be starting to intensify.

The decision marks the 17th month in a row that the central bank has shied away from raising interest rates to help ward off new inflation--as some of its top officials believe it should--because of anxiety about the impact of the Asian slump.

David M. Jones, economist at Aubrey G. Lanston & Co., said the Fed’s decision was no surprise, given the continued uncertainty over the Asian crisis and the absence of any visible threat from inflation here at home.

“It’s much too early to declare victory” as a result of the June decline in the trade deficit, Jones said. “I just don’t think it’s going to last. It’s still very hard to say just how far the Asian crisis will drag us down.”

The deteriorating trade deficit has proved to be a mixed blessing for the United States. Although U.S. manufacturing industries have been hit hard by the decline in their export sales, the economy here has avoided overheating, which might have reignited inflation.

Most analysts believe that, had it not been for the impact of the Asian slump, the Fed would have raised interest rates as early as last summer. Although the U.S. economy is now growing more slowly, labor markets here are unusually tight, and wage levels are starting to rise.

There was some speculation Tuesday that the drop in the trade deficit for June could raise the estimate of the economy’s growth rate for the second quarter. Preliminary estimates showed that the economy grew at a 1.4% annualized rate, from 5.5% in the previous quarter.

However, economists said the trade impact could be offset by other factors, such as weaker-than-expected consumer spending and inventory building, which might well negate any gains. Most analysts believe the economy will grow more rapidly in the autumn and winter.

Despite the improvement in June, the trade deficit reported Tuesday was still close to an all-time high. U.S. exports of goods and services fell 0.6% to $76.2 billion. Import levels plunged 2% to $90.3 billion.

As has been usual for the last several months, the impact of the Asian crisis was fully evident. The deficit for newly industrialized countries in Asia jumped to $2.4 billion in June--the highest in 8 1/2 years--from $1.6 billion the previous month.

The U.S. gap with Japan also surged, hitting $5.3 billion in June, up from $4.9 billion in May.

The deficit with China also rose, climbing to $4.7 billion from $4.6 billion in May. The red ink deepened in trade with South Korea as well, jumping to $944 million from $609 million in May.

The trade gap with Mexico also rose in June, edging up to $1.6 billion from May’s $1.5 billion. The deficit with Canada, however, remained virtually unchanged at approximately $1.2 billion in both months. The General Motors strike distorted both figures.

Tuesday’s report brought the overall trade deficit for the first six months of 1998 to $78.83 billion--up sharply from the $54.65 billion total recorded at this time a year ago. Forecasters expect the deficit for all of 1998 to top $160 billion, up from $110.2 billion last year.

Analysts were divided over the implications of the June decline in the trade deficit.

While conceding that the gap could widen again from month to month, Paul L. Kasriel, economist at Northern Trust Co., said the figures suggest that the trade deficit may prove to be “less of a drag” on the economy in coming quarters.

“The worst is over on the trade side,” Kasriel said.

But Lawrence Chimerine of the Economic Strategy Institute, a nonpartisan think tank, said the month-to-month movements were too volatile to make the June figures significant by themselves.

“The best you can say about today’s report is that it might indicate that the deficit is not going to rise at the same pace as it has,” Chimerine said. “But I’d be shocked if it turns out to be the peak of the trade deficit.”

The Fed’s decision Tuesday left the target for its so-called federal funds rate--the interest rate charged on overnight loans between banks--unchanged at 5.5%.

Tuesday’s report on consumer prices said retail prices were 1.7% above their levels of a year ago--one of the lowest such increases in years.

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Trade Deficit

Month-by-month change in overall U.S. trade deficit in goods and services, in billions of dollars:

June: $14.15 billion

Source: U.S. Commerce Department

Consumer Prices

Percent change, month to month, in consumer price index, seasonally adjusted:

July: 0.2%

Source: U.S. Bureau of Labor Statistics