By Associated Press - Tuesday, July 12, 2011

The U.S. trade deficit surged in May to the highest level in more than 2½ years, driven wider by a big increase in oil imports and a decline in exports.

The Commerce Department said Tuesday that the deficit increased 15.1 percent to $50.2 billion in May, the largest monthly imbalance since October 2008. May’s figure put the projected annual rate for 2011 at $563.2 billion, 12.6 percent higher than the 2010 imbalance.

The damage fell on both sides of the ledger. U.S. exports declined 0.5 percent to $174.9 billion while imports rose 2.6 percent to $225.1 billion.

Oil prices have fallen since May, so the effect of higher prices on the trade deficit should ease in the coming months.

Analysts said the wider deficit in May means the economy probably grew at an even slower pace in the April-to-June quarter than they had forecast. Paul Dales, chief U.S. economist at Capital Economics, said he was now looking for economic growth of about 2 percent in the second quarter. That is roughly the same pace as the first three months of the year.

The deficit with China jumped to $25 billion, the largest monthly gap since November. The deficit with Japan fell 26.4 percent to $2.6 billion. Japanese imports shrank further because of supply-chain disruptions caused by the March earthquake and tsunami.

Economists say Japan is starting to rebound from the crisis and a parts shortage that followed those disasters is beginning to dissipate. As a result, Japan’s factories should increase shipments to the United States in the next few months.

“As the supply-chain disruptions continue to unwind, we expect imports from Japan over the next few months to recover and for the overall trade deficit to modestly widen later this year before leveling off in 2012,” said Troy Davig, an economist with Barclays Capital.

Jennifer Lee, a senior economist at BMO Capital Markets, noted that while total imports from Japan declined, imports of Japanese auto parts rose. She said that indicates Japanese auto plants were starting to resume more normal operations and supply U.S. factories with critical component parts.

American companies depend on component parts supplied from Japan. The supply-chain disruptions have slowed production at U.S. factories, particularly among companies that make automobiles and electronics.

Manufacturing has been one of the strongest areas of the U.S. economy in the two years since the recession officially ended. Sales in foreign markets have been helped by increased demand and a weaker dollar, which makes U.S. goods cheaper overseas and imported goods more expensive.

Last year, the U.S. deficit with China hit $273 billion, the largest deficit the U.S. has ever had with any country. The huge trade gap between the two countries has prompted many companies and members of Congress to criticize China for manipulating its currency — some charging a 40 percent undervaluation — to gain a trade advantage.

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