Asian Slump Spurs May’s Trade Deficit to Record

The deepening economic slump in Asia propelled the U.S. foreign trade deficit to another record high in May as hard-hit Asian countries bought fewer U.S. exports and Americans stepped up their purchases of imports, the government reported Friday.

The May deficit of $15.8 billion, which exceeded the previous monthly high of $14.3 billion set in April, put the nation on track toward a record of more than $160 billion for the year. Analysts said the deficit could mushroom to more than $200 billion in 1999.

Exports fell by 1.3% in May to $76.23 billion, the Commerce Department said. Imports rose 0.5% to $91.98 billion.

The collapse of America’s markets in Asia was stunning. The department said exports to Asia for the first five months of 1998 were 24% below their level for the same period in 1997.

Partly as a result, the United States is expected to post little or no overall economic growth for the second quarter of this year, following the frenetic 5.2% pace set during the first three months. It could even show a slight decline.

Lyle Gramley, a former member of the Federal Reserve Board, said that while a drop would not necessarily mean the United States is heading into a recession, it would show that the impact from the Asian crisis is proving to be substantially larger than originally expected.

Like most economists, however, Gramley believes that consumer spending will continue to be strong, keeping the domestic economy robust, despite weakness in the manufacturing sector. “We’re likely to see a solid rebound in the fourth quarter of this year,” Gramley said.

The deterioration in the U.S. trade position was not limited to Asia. The deficit with Canada also rose sharply to $1.8 billion from $1.1 billion in April. The deficit with Mexico rose to $1.5 billion from $1.3 billion. The United States ran a $4.6-billion deficit with China, up from $4.3 billion in April. But the deficit with Japan fell in May to $5 billion, from $5.4 billion the previous month.

For the first five months of 1998, U.S. exports to Asia fell almost uniformly: off 51% from their 1997 levels to Indonesia, 45% to South Korea, 27% to Thailand, 12% to Singapore, 11% to Japan and 10% to Hong Kong. The only major increases were in U.S. exports to China (6%) and Taiwan (1%).

Commerce Secretary Bill Daley said at a briefing that it is “a pretty good bet that this [monthly increase] is not the peak.”

At the same time, Daley pointed out, the U.S. domestic economy is “strong and vital,” with both unemployment and inflation at their lowest levels in a generation and investment and retail sales continuing apace.

While conceding that the economy is likely to sputter for a quarter or two, he insisted that it was not about to run out of breath. “This is a marathon, not a sprint,” he told reporters.

The commerce secretary also made the point that the deterioration in the trade deficit so far has stemmed almost entirely from the collapse of U.S. export markets in Asia and not from a surge in imports from the region, as some economists had feared.

Some analysts had predicted that, aided by the depreciation of their own currencies--which makes Asian goods less expensive for Americans buying them with dollars--the Asians would seek to export their way out of their economic slump by flooding the U.S. market.

So far, however, “we are not seeing sharply rising imports from Asia,” and Asian shipments have been increasing “at the same moderate rate . . . as they have been rising from the rest of the world,” he said.

Analysts said part of the reason is that because of the shortage of capital and the high interest rates in their home countries, Asian entrepreneurs have had difficulty obtaining the capital they need to step up exports to the United States.

The May decline in overall exports marked the fourth time in five months that U.S. shipments abroad fell. Export levels now are down 3.1% from their level of a year ago. Before that, the nation was experiencing an export boom.

The declines in exports were concentrated in automobiles, auto parts and capital goods. Exports of civilian aircraft, which are particularly volatile from month to month, rose during May.

In one possible benefit from the widening trade gap, analysts said there now is virtually no chance that the Federal Reserve Board will raise interest rates over the next several months.

Until recently, many analysts had expected the Fed to nudge interest rates higher to prevent the economy from overheating. Policymakers had feared that unless the economy slowed on its own, inflation pressures would build up again.

But Bruce Steinberg, chief economist for Merrill Lynch & Co., said that because of the collapse of Asian export markets, the U.S. economy “is being subjected to an immense production shock” that is likely to stunt its growth for the next several months.

Analysts said the collapse of the Asian economies is not the only reason for the deterioration in the U.S. trade position. Another is that the U.S. dollar is so strong, making exports more expensive for foreign buyers and imports more attractive here.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Growing Deficit

U.S. trade deficit, in billions of dollars:

May, 1998:-$15.8 billion

Source: Commerce Department