- The Washington Times - Friday, January 28, 2005

The billowing trade deficit clipped growth to a 3.1 percent rate at the end of last year, but that did not prevent the economy from posting its best performance since 1999 with full-year growth of 4.4 percent.

Yesterday’s report from the Commerce Department showed a healthy expansion in the fourth quarter, with consumers showering a 4.6 percent increase in spending on items big and small during the Christmas season, and businesses barreling ahead with stock building and a 15 percent increase in equipment investments.

Nations all over the world benefited from the largess of American shoppers. The spending binge lifted imports by 9 percent during the quarter, including petroleum from OPEC, toys and textiles from China, and a myriad of other goods from nearly every nation.

But the splurge on imports detracted from growth at home, as did a decline in exports during the quarter, the department said. It estimated growth would have been closer to 5 percent without the import penetration.

“The record trade deficit proved to be a formidable drag,” said John E. Silvia, chief economist of Wachovia Securities, but it did not keep economic growth from recording solid gains last year.

A revival of business investment during the year, kick-started by deep federal tax write-offs for equipment purchases, combined with the first year of job growth since the 1990s to spur consumer and business spending and produce the best growth since the 1990s economic boom.

But despite renewed job growth, a separate report from the Labor Department yesterday showed that incomes got zapped by big increases in health care, pensions and other benefit costs.

The 2.4 percent rise in wages and salaries during the year was the smallest since the department started counting in 1982. What crimped wage growth was a 6.9 percent surge in benefit costs.

Consumer purchasing power also got pinched last year by record high oil, gas and heating costs — another trend that is likely to continue this year, economists said. The price of premium crude flirted with $50 a barrel in New York trading this week.

“Uncertainty about oil prices and terrorism” continues to cloud the outlook for business and the economy, said Bill Zadrozny, chief executive officer of Siemens Financial Services Inc. “The concerns haven’t changed, but we’ve become more accustomed. We’re adapting. We’re dealing with it.”

The respectable growth seen last year should continue this year, he said. But any break in the clouds hanging over the economy — whether a resolution of the Iraq conflict, a substantial drop in oil prices or a clear move by Congress to cut the budget deficit — could unleash a new wave of hiring and business expansion, he said.

Businesses on Wall Street and Main Street see bringing down the budget deficit — which is projected to hit a record of $427 billion this year — as critical to reducing the trade deficit, which also is in record territory over $600 billion.

The budget deficit, which represents overspending by the government, is believed to feed the trade deficit, which represents overspending by the nation as a whole. Both deficits put pressure on interest rates because they require financing from overseas.

“It’s a problem. The deficit’s front and center,” Mr. Zadrozny said. “If the administration makes the move they talk about making, and if Congress gets to work and starts making significant, visible progress, that’s a positive signal,” he said.

Another measure needed to reduce the trade deficit, economists say, is an adjustment in China’s exchange rate, which the Beijing government currently pegs to the dollar. America’s trade deficit with China accounts for a quarter of the overall deficit.

Because China is growing much faster than the United States — it posted a torrid 9.5 percent growth rate last year — economists say its currency should be appreciating against the dollar.

A drop in the dollar would raise the cost of Chinese goods and eventually prompt a fall in imports. The dollar has fallen significantly against most other currencies since 2001, but, largely because of the China exception, that has not helped to reduce the trade deficit.

While Chinese officials acknowledge that they eventually must break the tie between the dollar and the yuan, they have been in no hurry to do so.

Yesterday, an executive of the Bank of China, which has close ties to China’s central bank, said he did not expect any currency revaluation in the next six to 18 months. Zhu Min, the bank’s executive assistant president, told the World Economic Forum in Davos, Switzerland, that China is under no domestic pressure to do anything because inflation there is low.

It also needs time to strengthen its weak financial system through bank recapitalization and market liberalization programs, he said.

Representatives from China, Brazil and India have been invited to a meeting of the Group of Seven finance ministers in London next Friday and Saturday, where officials of the United States, Japan and Europe are expected to press the currency issue.

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