U.S. Trade Gap Increases 3.6%

The deficit in the broadest measure of international trade widened to a record $195.1 billion in the first quarter as the country sank deeper into debt to Japan, China and other nations.

The Commerce Department reported Friday that the deficit in the current account increased 3.6% from the previous quarterly record, an imbalance of $188.4 billion in the final three months of 2004.

The current account deficit has risen to record heights in recent years as America’s demand for foreign goods and services has soared, raising worries about the country’s ability to continue financing a trade deficit at such heights.

“The seemingly insatiable U.S. demand for imports continues to drive the current account deficit higher,” said Nigel Gault, U.S. economist at research and data provider Global Insight. “At present, the rest of the world is happy to keep financing the deficit -- but that won’t be the case indefinitely.”

In other economic news, the preliminary June reading from the University of Michigan survey of consumer sentiment showed a rebound to 94.8, its highest level since January and a sharp increase from May’s reading of 86.9.

The current account deficit for all of 2004 hit a record $668.1 billion, an increase of 28.6% from the previous record of $519.7 billion in 2003.

The current account is the broadest measure of foreign trade because it covers not only trade in goods and services but also foreign aid and investment flows between nations.

The U.S. deficit must be financed by foreigners agreeing to hold more in dollar-denominated investments, something that they have been quite happy to do as they sell Americans more and more foreign cars, television sets and other consumer products.

However, economists worry that at some point foreigners may lose their enthusiasm for dollar-denominated investments and begin dumping their holdings in U.S. stocks and bonds. Such a development could cause interest rates in the United States to soar and push the value of the dollar and U.S. stocks down sharply. If the reaction was severe enough, it could push the country into a recession.