Trade Deficit Widens Less Than Expected

(Bloomberg) -- The U.S. trade deficit widened less than expected to $57 billion in April as record imports signaled healthy consumer demand and unprecedented exports provided good news on manufacturing.
The trade gap in goods and services followed a $53.6 billion deficit in March that was narrower than the government first reported, the Commerce Department today said in Washington. Imports rose 4.1 percent, the biggest increase since November 2002, as Americans paid record prices for oil and bought more Chinese textiles. Exports rose 2.9 percent, the most this year.
``The huge U.S. trade deficit may finally be stabilizing,'' said Peter Kretzmer, a senior economist at Banc of America Securities Inc. in New York.
The report supported Federal Reserve Chairman Alan Greenspan's testimony before Congress yesterday that the U.S. economy is on ``relatively firm footing.'' Strength in exports from manufacturers such as airplane-maker Boeing Co. led some economists to raise growth estimates, and the dollar climbed to a nine-month high against the euro.
``The economy is on a somewhat stronger growth trajectory,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. He said the economy may grow at about a 3.5 percent annual rate this quarter compared with his previous estimate of 3.1 percent.
The figure showing March's deficit was narrower than first reported suggests first-quarter economic growth will be revised higher. Adjusted for inflation, April's trade gap of $56.1 billion was lower than the $59.1 billion average for the first quarter. A narrower gap would contribute to growth this quarter as well.
Another report today showed import prices fell 1.3 percent in May, more than forecast and the first decline this year.
Healthy Demand
Imports were $163.4 billion in April, exports reached $106.4 billion and the nation's trade deficit with China widened 14 percent to $14.7 billion. While trade gaps subtract from growth, economists also consider rising imports a sign of healthy demand.
``This report supports Greenspan's rosy economic view that the economy is likely to continue to grow unabated this quarter thereby justifying continued increases in short-term rates,'' said Anthony Chan, a senior economist at JPMorgan Asset Management in Columbus, Ohio, who accurately predicted the gap.
Economists expected the deficit to widen to $58 billion for the month compared with a previously reported $55 billion gap in March, according to the median estimate of 68 economists' forecasts in a Bloomberg News survey.
Dollar
The dollar advanced against the euro to $1.2119 at 4:22 p.m. in New York from $1.2230 late yesterday. It's the highest dollar value against the euro since September. The dollar rose to 108.63 yen from 107.43.
U.S. 10-year Treasury notes fell for the third day, the longest drop since March, pushing the yield above 4 percent for the first time this month.
The trade gap is still running wider than last year, when it reached a record $617.6 billion. The deficit reached $228.7 billion in this year's first four months compared with $187.3 billion in the same period of 2004.
The record imports in April reflected the highest prices ever for petroleum and a jump in purchases of Chinese textiles. The value of U.S. oil imports rose in April to $14 billion from $13.4 billion the previous month. The price per barrel increased to $44.76, the most ever in the report, compared with $41.14 in March. The nation imported 313.8 million barrels for the month compared with 326 million barrels in March.
Import Prices
Oil may not contribute to the trade deficit in May. A Labor Department report today showed prices of imported goods fell 1.3 percent that month, more than forecast and the first decline this year, reflecting lower costs of petroleum, autos and building materials.
Americans spent 5.5 percent more on foreign-made consumer goods and 7.6 percent more on capital goods. Imports of autos and parts rose 1.2 percent in April.
Toyota Motor Corp. and Nissan Motor Co., Asia's two biggest automakers, said last month U.S. sales of cars and trucks increased more than 25 percent in April compared with the same month last year.
The rise in exports reflected increases in business equipment and industrial supplies. Foreign businesses spent 5.5 percent more on capital goods, led by purchases of commercial aircraft. Chicago- based Boeing, the world's No. 2 commercial-jet maker, said this month it delivered 16 aircraft to foreign buyers in April compared with 12 a month earlier.
Industrial supplies rose 5 percent, led by sales of fuel oil and plastics. Exports of consumer goods fell 1.4 percent.
Currencies
A drop in the value of the dollar may be contributing to the gains in exports. A cheaper dollar makes U.S.-made goods less expensive to foreign buyers. The dollar is down 14 percent against a trade-weighted basket of currencies from the nation's biggest trading partners since reaching a high in February 2002, according to Federal Reserve figures.
``We saw decent exports here. The weak dollar is beginning to have its effect,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, in an interview. ``I think that will continue to happen, although I really don't expect the trade deficit to narrow until the end of this year if at all.''
Because the U.S. imports about 50 percent more goods and services than it exports, exports have to grow about twice as fast just to stabilize the trade deficit, economists said.
China
April's wider gap with China reflected an 11 percent increase in textile imports. Textile imports are up 52 percent so far this year from the same four months of 2004, the report showed. The overall trade deficit with China is up 35 percent so far this year.
China came under renewed pressure from the world's richest nations and the International Monetary Fund to make its currency's exchange rate more flexible. ``For their own sake and the sake of global economy, we're urging them to move to greater flexibility,'' Treasury Secretary John Snow said in an interview yesterday.
In London, where Snow and other finance ministers from the Group of Eight nations gathered for two days of talks, U.S., Japanese and IMF officials again urged China to end its decade-old currency link to the dollar.
``China needs to throw the G-8 a bone here,'' said Kenneth Rogoff, a Harvard University professor who was formerly the chief economist at the IMF, in an interview. ``They need to do some gesture in this dimension, even if switching to a basket'' of currencies of pegging the yuan only to the dollar.
By region, the department reported the trade deficit with Japan narrowed to $7.2 billion from $7.8 billion. The deficit with the Organization of Petroleum Exporting Countries widened to $7.1 billion from $6.6 billion.
The deficit with Canada, the largest U.S. trading partner, widened to $9.8 billion from $9.3 billion. The gap with Mexico widened to $4.4 billion from $4.3 billion. The deficit with Europe increased to $11.8 billion from $10.9 billion.
The U.S. economy is likely to grow at a 3.3 percent annual pace this quarter and expand 3.5 percent this year, according to the median estimate of economists surveyed by Bloomberg News from May 31 to June 8.

To contact the reporter on this story:
Carlos Torres in Washington ctorres2@bloomberg.net