- The Washington Times - Wednesday, May 11, 2005

A record surge in exports and an unexpected falloff in imports in March enabled the economy to grow faster than previously thought last winter — at a 4 percent rate or higher instead of 3 percent.

That is the conclusion of economists after the Commerce Department yesterday reported an unexpected 9.2 percent drop in the monthly trade deficit to $55 billion, the lowest in a half year. The surge in exports was fueled by aircraft sales, while the decline in imports was fed by a tailing off of Chinese textile imports.

The surprising downturn in the deficit, the biggest since 2001, boosted the dollar and was greeted as good news on Wall Street, even though few expect it to be repeated in future months.

The report, which also revised the February deficit down to $60.6 billion from $61 billion, offered consolation to U.S. businesses deluged by competition from imports and means that the economy might have grown as fast as 5 percent in the first quarter, said Oscar Gonzalez, economist with John Hancock Financial Services.

“But the trade picture is still fairly dismal,” he said. “We still are on course to break last year’s record trade gap” because consumers are earning more and likely will want to indulge their “appetite for cheap foreign goods,” he said.

Although some economists might interpret March’s downshift in demand for imports as evidence the economy is softening, Mr. Gonzalez said it largely reflects the winding down of a surge of imported clothing from China that started at the beginning of the year when quotas were lifted.

Imports from China fell 4.4 percent, led by a 21.2 percent drop in clothing and textiles.

Manufacturers, battered by years of losing market share to Japanese, Chinese, Korean and other competitors, welcomed the report, but are not ready to break out the champagne just yet, said Frank Vargo, vice president of the National Association of Manufacturers.

“It’s too soon to know if we’ve reached a turning point on our deficit,” he said, although he noted the one area where the improvement may be more than fleeting is in trade with Europe.

The dollar has declined nearly a third against the euro in the last three years — by far the most against any currency — and that has made U.S. exports more attractive to European buyers while curbing demand for European imports.

But the gains with Europe are not enough to make up for the burgeoning deficit with China, Mr. Vargo said. Even taking into account March’s big import drop, the deficit with China is running at a $203 billion annual rate compared to $168 billion a year ago, he said.

Under pressure from textile and furniture manufacturers losing market share to China, the U.S. Congress and Bush administration have stepped up pressure on China to stop fixing its currency against the dollar and let it rise in the open market.

The Chinese have responded with mixed signals. Yesterday, a report in a major Chinese newspaper suggested that a revaluation of the Chinese yuan may come soon, but that was later denied by the Chinese central bank.

“The U.S. dollar is still 7 percent higher against foreign currencies than it was when it started its run-up eight years ago,” said Mr. Vargo. “The dollar has adjusted nicely against European, Canadian and some other market currencies, but has been prevented from adjusting against Asian currencies because governments there continue to intervene.”

Peter Morici, University of Maryland business professor, said the unexpected 2.5 percent drop in imports — much of it is in consumer goods and autos — could be explained by a pullback in consumer spending caused by high oil prices and health care costs. Oil imports, when adjusted for inflation, actually declined, he noted.

The drop in Chinese imports also may be the result of administrative measures taken by Chinese authorities to avoid political retaliation in the U.S., he said.

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