The U.S. trade deficit declined to a four-month low even though imports from China reached a new high. Demand for Chinese goods has remained strong despite recalls of unsafe products this year.
In other economic news yesterday, inflation at the wholesale level jumped 0.6 percent in July, driven up by higher energy costs. However, aside from of energy, wholesale inflation remained under control with core prices rising just 0.1 percent.
The trade deficit dropped to $58.1 billion in June, a 1.7 percent decline from May’s level, the Commerce Department reported.
It was a bigger improvement than had been expected and left the deficit at its lowest level since February. So far this year, the deficit is running at an annual rate of $705.5 billion, 7 percent lower than last year’s record deficit of $758.5 billion.
Analysts forecast that this trend will continue and allow the United States to finally record an annual drop in the deficit for the first time after five straight record imbalances.
Economists noted that the June deficit was much smaller than the one assumed by the Commerce Department when it published its preliminary figure for overall economic growth in the April-June quarter. Some suggested that with the boost from trade, the original growth estimate of 3.4 percent at an annual rate could be lifted as high as 4.2 percent.
With consumer spending and confidence under pressure from a slumping housing market and recent turbulence in the financial markets, the boost from export growth will help ward off the threat of a recession, analysts said.
“The economy needs something to step up and lead it forward and it looks like the export sector has become that savior,” said Joel Naroff, chief economist at Naroff Economic Advisors.
U.S. exports and imports both set records in June. Exports of goods and services rose by 1.5 percent to $134.5 billion, reflecting big increases in shipments of semiconductors, autos and farm products such as corn and meat.
Imports also set a record, rising by 0.5 percent to $192.7 billion as foreign crude oil rose to the highest level in nine months, reflecting a big jump in prices.
While the overall deficit declined in June, the imbalance with China rose by 5.7 percent to $21.2 billion. For the first half of this year, the deficit with China is up 15.3 percent over the same period in 2006, putting the country on track to surpass last year’s record deficit with China of $233 billion.
This widening deficit is occurring even though Chinese products from toothpaste and tires to toys and pet food ingredients have been hit by a string of recalls. Toy giant Mattel announced yesterday that it was recalling 9 million Chinese-made toys because of dangers to children from lead paint or tiny magnets that could be swallowed. Less than two weeks ago Mattel announced a separate recall of 1.5 million Chinese-made toys.
Critics point to the soaring trade gap with China as evidence of the failure of President Bush’s trade policies, which they contend have led to record deficits through most of his administration and contributed to the loss of 3 million manufacturing jobs since 2000.
Lawmakers are pushing various bills in Congress that would force the administration to take a tougher stance against China, including imposing economic sanctions, unless the Chinese halt what are seen as unfair trade practices.
“Continued failure by the U.S. government to combat China’s predatory trade practices is a prescription for more red ink,” said Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition, which represents U.S. textile companies.
The Bush administration, however, is arguing that the proposals Congress is considering would not work to narrow the deficit and that the best approach is to continue with a new high-level dialogue being led by Treasury Secretary Henry M. Paulson Jr. He is urging China to accelerate moves to allow its currency to rise in value against the dollar, which would make Chinese imports more expensive for Americans and U.S. goods cheaper in China.
“President Bush is committed to helping Americans benefit from the global economy,” Commerce Secretary Carlos Gutierrez said in a comment on the new trade figures. He urged Congress to pass four pending free-trade agreements.
The 0.6 percent rise in wholesale prices was far above the 0.1 percent increase analysts had been expecting. It reflected a hefty 2.5 percent jump in energy prices, which reversed a 1.1 percent decline in the previous month. Food prices dropped for a third straight month.
Core wholesale inflation, which excludes volatile food and energy costs, rose by a much more moderate 0.1 percent, even better than the 0.2 percent gain analysts had expected.
Analysts said the benign reading on core inflation should help relieve worries at the Federal Reserve and perhaps open the door for interest rate reductions in coming months should the economy continue to be rattled by turbulence in stock and credit markets.