Trade Deficit Hits New High, Tops Forecasts
The U.S. trade deficit set yet another record in June, far exceeding forecasts, as Americans snapped up foreign cars, computers, telecommunications equipment, food and other imported goods.
Although U.S. exports also rose to their highest level since November, they were not nearly enough to offset the burgeoning inflow of foreign products, the Commerce Department reported Thursday.
The resulting trade deficit was $24.6 billion, significantly more than the $20.6 billion that economists had been predicting. It was also $3.4 billion more than May’s trade deficit, itself a record.
The unexpectedly large deficit appeared to rattle financial markets. The dollar declined further in value, and stock and bond prices also dipped.
As more evidence of a robust U.S. economy, the trade figures did not alter expectations that the Federal Reserve will nudge interest rates upward for the second time this year when its Open Market Committee meets Tuesday. Analysts are still predicting the Fed will approve a modest quarter-point hike in the federal funds rate, to 5.25%.
Hardly any part of the world was left out of America’s June buying spree, but deficits widened notably with China, Japan and OPEC nations--all places where trade imbalances have generated friction in the past. The combined deficit with Japan and China reached $11.9 billion, well above the $10.5-billion average for the first half of 1999.
“China is right on the verge of displacing Japan as the country with the least open access to its economy,” said Ken Mayland, chief economist for KeyCorp, a regional bank holding company in Cleveland.
While Mayland said he regards the overall trade deficit as an indicator of America’s economic health, he fears it will trigger protectionist impulses. A federal commission already is looking into the impact of America’s large trade deficit, and sweeping protectionist legislation is before Congress.
Other economists also interpreted the large deficit as a sign of strong U.S. economic health. But the fact that foreign manufacturers satisfied such a large portion of the U.S. demand for goods may suggest that the economy is not expanding as rapidly as projected.
“It means this economy isn’t growing as fast as [we thought] it was, because instead of producing all these goods ourselves, we’re . . . importing them,” said Jeremy Siegel, professor of finance at the Wharton School.
The deficit figure was perceived with wariness by those watching capital flows. Foreign money has contributed mightily to the stock market boom, especially since investment opportunities in Asia and other developing markets soured in 1997. In addition to buoying the stock prices, those capital inflows have played the important role of financing the U.S. trade deficit.
Since big trade deficits tend to weaken a country’s currency, foreign investors could begin to regard America’s deficit as a sign that their dollar-denominated investments are at risk. This, in combination with the increasing attractiveness of Asian and European investment opportunities, might cause them to run for the door.
Already, the dollar has lost more than 20% of its value against the Japanese yen, and Tokyo stock indexes have soared. On Thursday, the unexpectedly big trade gap sent the dollar to an eight-month low against the yen and briefly sent the Dow Jones industrials down 118 points. The Dow closed down 27.54 points.
Susan Hering, chief economist for Indosuez Carr Futures Inc. in Chicago, said she wonders whether the current slide of the dollar is a sign that an exodus has begun.
Hering said she is particularly concerned about the size of the U.S. current account--which measures exports, imports and foreign interest payments--as a percentage of U.S. economic output. This ratio rose to 3% this year, she said, a level that has proven to be a flash point.
The last time America’s current account rose to 3% of output was in 1987, Hering said, and the dollar and Wall Street collapsed.
“Investors have strong herd instincts, and you can have mass exoduses at any time,” she said.
Other analysts remained optimistic, however, saying that the United States remains the best place for global investors to park their money.
“How can you not like an economy that has a 30-year-low unemployment and a 30-year-low inflation?” asked Cary Leahy, senior U.S. economist for Primark Decision Economics.
“Even though the current account would seem to be screaming at you, ‘Sell dollars! Sell dollars!’ where else would you put your dollars? Japan? Its economy still isn’t doing much. Certainly not in Southeast Asia. No one knows when the right time to dance is. They’ve been burned before.”
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Trade Deficit
The overall gap continues to reflect a deficit in the trade of goods and a surplus in services. In billions of dollars:
June: -$24.6 billion
Source: Commerce Department
