Second month of increase in trade deficit raises new worries for US economy

Business Materials 11 April 2008 03:12 (UTC +04:00)

(AP) - The U.S. trade deficit unexpectedly increased for a second straight month in February, raising concerns that the economy's one standout performer could be starting to flag.

The Commerce Department reported Thursday that the deficit between what the U.S. imports and what it sells abroad rose 5.7 percent to $63.2 billion (€39.81 billion) in February, the highest level since November.

Imports of goods and services shot up 3.1 percent to an all-time high of $213.7 billion (€134.61 billion), reflecting a big surge in imports of foreign cars. Exports also set a record, rising by 2 percent to $151.4 billion (€95.37 billion), reflecting strong gains in the sale of American-made heavy machinery, computers and farm goods.

Critics claimed that the sharp rise in the trade deficit showed the continued failure of President George W. Bush's policies emphasizing negotiating free trade agreements as a way to promote U.S. jobs by boosting exports.

With businesses cutting 80,000 jobs last month, the most in five years, and the country likely in a recession, the debate over trade is expected to intensify in this election year. Republicans contend Bush's policies reflect the reality of the new global economy, while Democrats argue that Bush has contributed to the loss of more than 3 million manufacturing jobs since he took office.

"Wages are falling and the middle class is shrinking because of trade deficits," James Hoffa, president of the International Brotherhood of Teamsters, said Thursday at the end of a three-day convoy across Pennsylvania aimed at highlighting the failings of Bush's trade policies.

Trade is shaping up as a key issue in the presidential campaign and in the fight for control of Congress. In an early showdown, the Democratic-led House voted 224-195 on Thursday to reject Bush's effort to force Congress to vote within the next 90 legislative days on a free trade agreement with Colombia.

The administration charged that Democrats were forsaking a key South American ally while Democrats said Colombia needed to do more to halt the violence against union organizers before they would consider the trade pact. The vote also calls into question pending free trade deals with South Korea and Panama.

In other economic news, the number of newly laid off workers filing claims for unemployment benefits fell sharply last week after having hit the highest level in more than two years in the previous week. The Labor Department said applications for jobless benefits totaled 357,000 last week, down by 53,000 from the previous week. Economists said the wide swings reflected in part the trouble the government is having in seasonally adjusting the figures.

Meanwhile, U.S. retailers reported mixed results in March. Wal-Mart and Costco Wholesale Corp. were among the best performers. Other retailers said their sales suffered from the weak economy and an early Easter that dampened clothing sales.

On Wall Street, investors were encouraged by the big drop in weekly applications for jobless benefits and the better-than-expected performance for some big retailers. The Dow Jones industrial average rose 54.72 points to close at 12,581.98.

For the first two months of this year, the trade deficit is running at an annual rate of $727.6 billion (€458.33 billion). Last year, the deficit declined to $708.5 billion for the entire year, fueled by a boom in exports. It marked the first decline in the trade deficit after five straight years of records.

With the economy battered by a prolonged slump in housing and a severe credit crunch, trade has been one of the few sources of strength. However, analysts said based on the rising deficit in the first two months, trade will likely provide less of a boost in the first three months of this year, making it more likely that the overall gross domestic product turned negative.

Brian Bethune, chief U.S. financial economist for Global Insight, said he expected GDP would decline at an annual rate of 0.1 percent to 0.2 percent in the first quarter. The classic definition of a recession is two consecutive quarters of declining GDP.

Bethune said the big jump in auto imports in February may be reflecting a move by American consumers toward more fuel-efficient foreign cars, which would be another blow for struggling U.S. automakers.

Many analysts believe the two-month jump in the deficit will be reversed in coming months because they think a recession in the United States will cut into demand for foreign goods as well as U.S.-made products.

For April, the politically sensitive deficit with China dropped by 9.6 percent to $18.4 billion (€11.59 billion), the lowest imbalance in a year. The improvement reflected big declines in imports of computers, cell phones and other telecommunications equipment as well as clothing. Even with the decline, the U.S. deficit with China remained the largest with any country. The next highest deficit was an imbalance of $6.9 billion (€4.35 billion) with Japan.

America's foreign oil bill fell 5.7 percent to $37.7 billion (€23.75 billion) in February, marking the first monthly decline in a year. It occurred even though the average price for imported crude oil hit a record of $84.76 (€53.39) in February. With crude oil prices hitting new records above $110 (€69.29) per barrel, analysts believe the petroleum bill will resume rising in coming months.

The deficit with the European Union rose to $6.9 billion (€4.35 billion) in February, up 13.5 percent from January, even though U.S. exports to Europe hit an all-time high, reflecting the fact that a decline in the dollar to record lows against the euro has boosted the price competitiveness of American products.