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U.S. Economy: Trade Deficit Widened to a Record $68.9 Billion

Dec 3, 2005
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St.gallen, Switzerland
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U.S. Economy: Trade Deficit Widened to a Record $68.9 Billion

Dec. 14 (Bloomberg) -- The U.S. trade deficit widened to a record $68.9 billion in October, a government report showed, surprising analysts who had expected falling fuel prices to narrow the gap.

An increase in imports of crude oil, automobiles and television outweighed a rise in exports. The shortfall in goods and services trade reported by the Commerce Department today exceeded even the highest estimate in a Bloomberg News survey of economists. The U.S. had record deficits with China, Canada and Mexico. In September, the gap was $66 billion.

The report suggests U.S. economic growth may be limited in coming months as the country relies more on overseas rather than domestic production to meet demand for electronics, clothes and other goods, economists said. Morgan Stanley reduced its fourth- quarter growth forecast to 3 percent from 3.4 percent.

``This kind of number is going to take a big chunk out of fourth-quarter growth if things stay at these levels in November and December,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte, North Carolina. ``The implication is that U.S. domestic demand is very strong.''

Imports rose 2.7 percent and exports increased 1.7 percent in October. The resumption of Boeing Co. aircraft shipments after a strike and an increase in business equipment exports to overseas economies that are on the mend weren't enough to improve the trade balance.

Economists expected the deficit to narrow to $62.9 billion for the month, according to the median of 62 estimates in a Bloomberg News survey. The estimates ranged from $59.5 billion to $65 billion.

U.S. Dollar

The U.S. dollar, which was down by the most in four months against the Japanese yen before the U.S. trade report, extended earlier losses. A wider trade deficit suggests the dollar needs to weaken in order to make imports more expensive to adjust the balance.

Against the yen, the dollar fell to 117.20 at 9:55 a.m. in New York from 119.95 yen late yesterday, according to electronic foreign-exchange dealing system EBS. The dollar also dropped to the lowest in a month against the euro and weakened versus at least a dozen other currencies after the Federal Reserve yesterday stopped saying there is ``accommodation'' in its policy. The dollar dropped to $1.2029 per euro from $1.1945.

The dollar is still headed for the first annual gain in four years, climbing 15.5 percent against the yen and 12.6 percent versus the euro. It reached a two-year high against the euro on Nov. 15.

A separate report today from the Labor Department showed that import prices fell more than forecast in November. The cost of imported goods declined 1.7 percent, the biggest drop since April 2003. Excluding petroleum, prices fell 0.2 percent.

Goods Deficit

The deficit in goods widened to a record to a record $73.9 billion from $71.3 billion in September.

``Growth in the rest of the world isn't enough to offset the very robust consumption from the U.S.,'' Lara Rhame, a currency strategist at Credit Suisse First Boston in New York. ``The U.S. consumer remains very thirsty for global goods. Trade is always a double-edged sword for the U.S. It lowers GDP, but it certainly highlights very robust domestic demand.''

The U.S. economy will grow by as much as 4 percent in 2006, Treasury Secretary John Snow said in an interview.

``We're looking at continued job creation, good productivity, expansion of the economy overall,'' Snow said.

Imports of goods and services increased to $176.4 billion in October from $171.8 billion. The value of crude oil imports rose even as the price fell to $56.29 a barrel, compared with $57.32 in September. Oil futures on the New York Mercantile Exchange averaged $62.39 a barrel last month, down from $65.55 in September. Hurricanes Katrina and Rita disrupted Gulf Coast energy supplies and drove prices to records in September.


The U.S. imported 304.5 million barrels of crude oil in October, up from 278.5 million a month earlier.

Exports of both goods and services rose to $107.5 billion in October from $105.8 billion the previous month. Exports of capital goods, which include civilian aircraft, rose $1.8 billion from September. Exports of industrial supplies, such as chemicals and fuel oil, increased $59 billion from a month earlier. Exports of consumer goods fell $554 million.

The monthly trade deficit with China increased to $20.5 billion, the highest ever, from $20.1 billion in September. The U.S. trade deficit with China for the first 10 months of the year was $166.8 billion, compared with $131.1 billion at the same time last year.

Some U.S. lawmakers and manufacturers claim China keeps the value of its currency, the yuan, artificially low, giving it an unfair advantage by making Chinese goods cheaper abroad. Still, today's data showed exports to China were a record.


China's currency has gained less than 0.5 percent versus the dollar since the government revalued it by 2.1 percent on July 21 and said it would allow the yuan to fluctuate against a basket of currencies. The Bush administration said it expects more.

``We are pleased with their commitment to move to greater flexibility. We haven't seen as much movement as we should have seen,'' Snow said after a speech in Washington on Dec. 8. ``I trust that we will. It is important that we see that happen.''

China's currency exchange rate was ``properly adjusted'' this year and takes into account effects on the country's neighbors and the world, Premier Wen Jiabao said at a regional meeting in Malaysia this week.

China's trade surplus narrowed in November as exports rose at the slowest pace in more than three years, the Beijing-based commerce ministry said last week. The smaller surplus is unlikely to ease U.S. pressure on China to allow its currency to appreciate, economists said.


U.S. exports increased in October on more shipments of aircraft. Boeing, the second-biggest commercial aircraft maker, said shipments to foreign customers jumped to 13 in October from 2 in September. The Chicago-based company reached an agreement in late September with its striking machinists union.

Huntsman Corp., the fourth-biggest U.S. chemical maker, said on Oct. 10 that it resumed production at plants in Louisiana and Texas that had been closed before Hurricane Rita. Chemical exports increased in October, today's data showed.
The outlook for all exports is improving as economies abroad gain momentum, economists said. Japan's Nikkei 225 Stock Average surged to its highest in more than five years this week as companies such as Matsushita Electric Industrial Co. and Toyota Motor Co. unveil expansion plans to meet rising demand at home and overseas.

Investor confidence in Germany, Europe's biggest economy, rose the most in more than 12 years amid signs export-led growth is encouraging companies to invest more at home.

Third Quarter

General Electric Co., the world's biggest maker of turbines for power plants, won a contract to supply Nigeria with 18 turbines, equipment and services for five electricity-generating plants. The turbines will be made at GE Energy's plant in Greenville, South Carolina, and be delivered from June to September 2006.
The U.S. trade deficit averaged $61 billion in the third quarter and subtracted 0.25 percentage point from gross domestic product. Adjusted for inflation, the U.S. deficit widened to $60.6 billion in October from $58.9 billion, today's figures showed.

Because the U.S. imports about 50 percent more goods and services than it sells abroad, exports have to grow about twice as fast just to stabilize the trade deficit, economists said.

The U.S. economy will probably expand 3.5 percent this year, compared with 2 percent for Japan and 1.3 percent for the countries that use the euro as their currency, according to last month's Blue Chip Economic Indicators median forecast.

By region, the Commerce Department reported that the trade deficit with Japan widened to $7.4 billion from $6.4 billion. The deficit with the Organization of Petroleum Exporting Countries grew to a record $9.4 billion.

Elsewhere, the deficit with Canada, the largest U.S. trading partner, widened to $8.1 billion. The gap with Mexico increased to $4.8 billion. The deficit with the European Union widened to a record $12.1 billion from $10.1 billion.

To contact the reporters on this story:
Joe Richter in Washington Jrichter1@bloomberg.net

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