Upheaval Widens U.S. Trade Gap

Global economic turmoil pushed the broadest measure of the nation’s trade deficit to a record high in the April-June quarter, the government said.

And foreigners are using earnings on their export sales to snap up U.S. assets, including government-guaranteed Treasury securities, a report from the Commerce Department showed Thursday.

The current-account deficit, which includes trade in merchandise, services and investments, rose 20% to $56.5 billion from the previous record, a revised $46.7 billion in the first quarter. The first-quarter deficit was originally reported as $47.2 billion.

The increase puts the nation on track to register a deficit above $200 billion for all of 1998. That would be the worst since the government began tracking the data and would beat the record of $168 billion set in 1987. Last year’s deficit was $155 billion.

Economist Gerald Cohen of Merrill Lynch said the current-account deficit will get worse before it gets better, subtracting a full percentage point from economic growth next year.

With economic troubles hitting Asia starting last summer and, more recently, Russia and Latin America, American companies are watching export sales slump. At the same time, sharply devalued foreign currencies have permitted foreign companies to sell cheaply in the United States.

And foreigners, dismayed at the turbulence in their countries, are using trade earnings to invest in the United States.

The value of foreign-owned assets in the United States rose by $163.4 billion. That included a $25.7-billion increase in holdings of Treasury securities, reflecting buying by international bond mutual funds based in the Caribbean.

Foreign investors also increased their purchases of corporate and other bonds, but the advance in foreign purchases of U.S. stocks slowed from the previous quarter.

“The purchases from the Caribbean are really foreign households and companies fleeing their own currencies,” said economist Mark Zandi of Regional Financial Associates in West Chester, Pa. “The Caribbean is a conduit. You have anonymity. Taxes are nonexistent. It’s just an easy way to invest in the United States if you live overseas.”

The value of U.S. assets overseas increased too, but not as much. They rose $95.7 billion, reflecting an increase in U.S. bank lending in Western Europe.

Meanwhile, the Labor Department said the pilots strike and related layoffs at Northwest Airlines pushed up the number of first-time applications for unemployment benefits last week to a seven-week high. Benefit claims totaled a seasonally adjusted 312,000, up from 304,000 the week before and the most since the week ended July 18.

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Record Deficit

Cheaper imports from Southeast Asia boosted the U.S. trade deficit to a record high in the second quarter. U.S. current account deficit quarterly since 1996, in billions of dollars:

1998: -$56.5

Source: Commerce Department