U.S. Trade Gap Shrinks in May

The trade deficit fell in May, reflecting a rise in U.S. exports to the highest level in history and a temporary decline in foreign oil prices. But the improvement is likely to be short-lived, with oil prices again hovering around record levels, analysts said.

The Commerce Department said Wednesday that the U.S. trade imbalance declined to $55.3 billion in May, an improvement of 2.7% from April.

However, the deficit with China rose to $15.8 billion, the highest since November, pushed upward by a 12.8% surge in imports of Chinese clothing and textiles. In the first five months this year, Chinese clothing and textile shipments are up 53.6% from the same period in 2004.

Even with the narrowing of the overall deficit in May, the trade imbalance through this year’s first five months is running at an annual rate of $681.6 billion, 10% above last year’s all-time record of $617.6 billion.

Analysts believe the underlying trends are so strong that the deficits this year and in 2006 will set new record highs.

“There is no question that the deficit this year will be worse than last year. A number of the improvements in May were temporary,” said Nariman Behravesh, chief economist at Global Insight, an economic forecasting firm in Lexington, Mass.

Analysts said that although global oil prices declined in May, fears about adequate supplies have sent prices surging in recent weeks to record levels above $60 a barrel.

Forecasts that the trade deficit will remain at record levels are raising concerns about the U.S.’ ability to continue depending on foreigners to hold ever-larger amounts of American dollars and dollar-denominated assets.

Should foreigners decide to reduce or even slow the rate of increase in their dollar holdings, it could mean a sharp fall in the value of the dollar as well as falling stock prices and rising interest rates.

None of those problems is evident yet. Although the dollar is off its highs of early 2002, the decline has been gradual and in recent months the greenback has been rising in value.

“We don’t seem to be having any trouble financing our large and growing trade deficits,” said David Wyss, chief economist at Standard & Poor’s in New York.

Wyss said foreigners were beginning to demand a higher return for their dollar holdings by pursuing outright purchases of U.S. companies such as the current targeting of Unocal Corp. by CNOOC Ltd., a Chinese oil company.

May’s trade performance was helped by strong export sales, which edged up 0.1% to a new record high of $106.9 billion. Sales of agricultural products, industrial supplies and consumer goods all set records.

Imports, after setting a record in April, dropped by 0.9% to $162.2 billion in May, reflecting a $1.3-billion decline in the U.S.’ foreign oil bill to $18.1 billion.

The improvement in oil came on the price side, with the volume of imports rising. But the average price for a barrel of crude dropped to $43.08, still the second-highest level on record but down from the record $44.76 average per-barrel price set in April.

The average oil import price tracked by the government is lower than the spot oil price set in market trading, which hit an all-time settlement high of $61.28 last week.

Analysts predicted that the oil bill would swell in coming months by $3 billion or more, reflecting the recent gains in oil prices.

After China, the largest deficits were with Japan, $6.6 billion, and Canada, $4.8 billion. The deficit with the 25-nation European Union totaled $10.5 billion.