- The Washington Times - Saturday, July 12, 2008

Despite soaring oil prices, the nation’s trade deficit unexpectedly narrowed by 1.2 percent in May when exports increased by $1.4 billion over April, which was double the rise in imports.

The monthly trade deficit, which economists expected to increase to more than $62 billion, actually declined from a revised $60.5 billion in April to $59.8 billion.

“The trade deficit is declining slowly, but it is declining,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. He cited a rise in manufactured exports and a dampening in demand for imported consumer goods because of the U.S. economic slowdown. The deficit would have improved much more were it not for the soaring price of oil, Mr. Hufbauer said.

Even though the daily volume of petroleum imports declined by nearly 7 percent in May, or by roughly 900,000 barrels per day, the cost of petroleum imports increased by $2.2 billion for the month. That happened in part because the average price for imported crude oil increased nearly $10 to a record $106.28 per barrel. A barrel contains 42 gallons.

Petroleum imports, which include crude oil and refined products like gasoline, cost $13.4 billion more last month than they did a year ago. Petroleum imports averaged 13.8 million barrels per day in May 2007 and 12 million barrels per day last month. The nation has paid nearly $400 billion for imported petroleum during the past 12 months. May’s imported petroleum bill of $40.4 billion reflects an annual rate of nearly $500 billion. Meanwhile, world oil prices have increased significantly since May.

Despite the soaring bill for imported oil, last month’s trade deficit was virtually unchanged from a year ago. That’s because exports, which were $158 billion last month, have increased by 18 percent, or $24 billion, from a year ago. Measured on an inflation-adjusted basis, exports were 10.1 percent and 17.5 percent higher during the first five months of 2008 than they were for comparable five-month periods in 2007 and 2006, respectively.

The value of wheat, corn and soybean exports rose sharply compared with last year. Manufactured goods in much greater demand overseas this year include civilian aircraft and engines, agricultural machinery, medicinal equipment, excavating machinery, telecommunications equipment, pharmaceuticals and toys, games and sporting goods.

The surge in exports has helped to keep economic growth positive in recent quarters. In fact, without the trade sector, which contributed an average of 0.9 percentage point to the economy’s annualized growth rate during the October-March period, average economic growth would have been negative.

Nevertheless, there are still trade problems beyond the oil sector. “The deficit in advanced technology products (ATP) is worse this year than last year,” said Charles McMillion, president and chief economist of MBG Information Services. Despite the ongoing depreciation of the dollar, which has helped exports in general, the trade deficit in ATP was marginally higher during the first five months of 2008 compared with last year. But the ATP deficit during the January-May period of 2008 ($18.9 billion) was 56 percent higher than the January-May 2006 ATP deficit ($12.1 billion).

So far this year, the ATP deficit with China alone is $27.1 billion; with Mexico, it is $8.5 billion.

“The big news for May was another jump in the trade deficit with China,” which increased more than $800 million to $21 billion, said Peter Morici, a professor of business at the University of Maryland. Despite the fact that China’s currency has appreciated 17 percent against the dollar since July 2005, China’s cumulative trade surplus with the United States during the first five months of 2008 ($96 billion) was 32 percent higher than its January-May 2005 surplus of $72.5 billion.

“Between the high price of oil, the rising deficit with China and the sad state of the New York banks, we are heading deeper into recession,” said Mr. Morici, who believes the economy fell into recession during the first half of the year, when employment declined for six consecutive months.

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