Trade Gap Widens as Imports and Exports Both Rise

By Beacon Staff

WASHINGTON – The trade deficit rose in May to an 18-month peak as rising imports offset another solid gain in U.S. exports. The surge in imports was a hopeful sign for the economic recovery because it suggested businesses are optimistic that U.S. consumers will spend more in coming months.

The trade gap grew 4.8 percent to $42.3 billion, the largest deficit since November 2008, the Commerce Department said Tuesday.

U.S. exports of goods and services rose 2.4 percent to $152.3 billion. It was the largest monthly total since September 2008, the month the financial crisis struck with force. Leading the strength in exports were heavy machinery, medical equipment, power generators and commercial planes.

Imports grew even faster. They rose 2.9 percent to $194.5 billion. That gain reflected higher demand for foreign-made cars and consumer goods such as clothing, furniture and electronic appliances. The surge came even though oil imports sank 9.1 percent as both the price and the volume of oil shipments declined.

Economists said the widening trade deficit would likely reduce overall growth, as measured by the gross domestic product, in the April-to-June quarter. But in the long run, analysts hold out hope that the gains in both exports and imports point to higher business investment and consumer spending.

“This will certainly prove supportive to economic growth in the months to come,” Martin Schwerdtfeger, an economist at TD Economics, wrote in a research note.

Through May, the U.S. trade deficit is running at an annual rate of $474.8 billion, up by 26.6 percent from $374.9 billion deficit for all of 2009. That had been the lowest annual trade gap since 2001, another year when the country was in recession.

The wider May deficit was a surprise to analysts, who had expected the gap to decline slightly because of the fall in oil imports. The larger trade gap caused some economists to trim their forecasts for overall growth in the April-June quarter, though many said they expected less of a drag in coming quarters.

Mike England, an economist at Action Economics, said he believed a widening trade deficit would trim nearly 2 percentage points off GDP in the second quarter. He put second-quarter growth at around 2.2 percent and projected a GDP growth rate of around 2.8 percent in the current July-September quarter.

But many economists saw the rise in imports as a sign of increased business optimism about the future. They said U.S. companies were importing more goods in anticipation of higher consumer spending later in the year.

“The strong increases in both export and import volumes are far more important as a sign of continued growth at home and abroad than the widening trade gap,” economists at forecasting firm RDQ Economics wrote in a research note. “It seems to us that the expansion of world trade has a robust momentum.”

American manufacturing has been a standout performer during the recovery, benefiting from a global rebound. Those gains risk being diminished by the European debt crisis, which has slowed growth in Europe and raised the value of the dollar 14 percent this year versus the euro. A stronger dollar against the euro makes U.S. goods costlier and less competitive in Europe.

The deficit with the European Union rose 7.5 percent to $6.2 billion as imports rose 3.2 percent, outpacing a 1.9 percent rise in U.S. exports to that region.

The deficit with China rose to $22.3 billion. It was the largest imbalance since last October and a 15.4 percent jump from the April deficit. So far this year, the U.S. deficit with China, the largest with any individual country, is up 10.2 percent from the same period a year ago. That deficit is putting pressure on the Obama administration and Congress to adopt a tougher stance in trade disputes with China.

“The widening trade deficit is not only an alarming trend, but also represents wealth and jobs heading overseas,” said Scott Paul, executive director of the Alliance for American Manufacturing, who called on Congress to pass legislation to impose trade sanctions on China for its currency policies.

Last week, the Obama administration declined to cite China in a report to Congress as a country that was unfairly manipulating its currency to gain trade advantages. That disappointed American manufacturers who say the Chinese yuan is undervalued by as much as 40 percent.

On June 19, just before leaders of the Group of 20 major industrial countries met in Toronto, China announced it would allow more flexibility in its currency. But critics note that the yuan has risen in value only slightly since then.

Sen. Charles Schumer, D-N.Y., has vowed to push for an early Senate vote on legislation that would impose sanctions on Chinese imports to the United States if Beijing doesn’t accelerate its currency reforms.

Some analysts warned that the widening trade deficit, and its impact on GDP, come at a bad time for the economy, which has been losing momentum.

“The widening trade gap is putting downward pressure on U.S. GDP when it is most vulnerable,” said Stuart Hoffman, chief economist at PNC Financial.

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