U.S. Economy: Trade Deficit Shrinks to $59.2 bn as Exports Climb

Sep 11, 2007 - The U.S. trade deficit unexpectedly narrowed in July as Boeing Co., General Electric Co. and Deere & Co. shipped more airplanes, engines and tractors overseas.

Surging exports may help cushion the U.S. economy from the impact of higher borrowing costs, weakening employment and waning consumer confidence. Exports reached records in each of the past five months, buoyed by the strongest global expansion since the 1970s and a weaker dollar.

The gap shrank 0.3 percent to $59.2 billion from a revised $59.4 billion in June that was bigger than previously estimated, the Commerce Department said today in Washington. Economists anticipated a shortfall of $59 billion.

"Foreign demand is strong," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. "It's a reminder that we do have a bit of a shock absorber."

Sales overseas climbed 2.7 percent, the most in three years, while imports rose 1.8 percent to $196.9 billion, also a record. The increase in imports reflected greater purchases of crude oil, drilling equipment and appliances. Overall demand for foreign- made capital goods slackened, led by a drop in computers.

The trade forecast was based on the median estimate of 70 economists surveyed by Bloomberg News. Projections ranged from deficits of $57.5 billion to $61.5 billion. The June deficit was initially reported at $58.1 billion.

The dollar remained lower against the euro after the report, trading at $1.3837 at 4:21 p.m. in New York, from $1.3802 late yesterday.

Exports Climb

The inflation-adjusted deficit, used to calculate growth, shrank to the smallest in three years.

Exports may help the economy expand as much as 3 percent in the third quarter, said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. His current estimate is 2.8 percent. Growth reached 4 percent from April through June.

American exports are benefiting from a decline in the dollar, which makes U.S. goods cheaper for foreign buyers. The dollar is down 7.9 percent since the beginning of 2006 against a basket of currencies from major trading partners, according to the Federal Reserve's Trade Weighted Broad Dollar Index.

Faster growth overseas is also protecting U.S. companies from slower demand at home. In the second quarter, China expanded 11.9 percent from a year earlier, the most in more than 12 years, and India grew at a 9.3 percent rate. Argentina's economy, the second-biggest in South America, will expand more than 8 percent this year, the government said on Sept. 5.

Growth Rates

The growth rates compare with a 1.9 percent pace of expansion in the U.S. and a 2.5 percent gain in the 13 countries using the euro.

"There are good signs for the trade deficit to gradually get smaller," said Brian Mandt, an economist at Deutsche Postbank AG in Frankfurt, who accurately forecast the gap. "The U.S. economy is definitely also benefiting from good growth outside the country."

Chicago-based Boeing is among the companies seeing overseas demand growing. The world's second-biggest airplane maker after Airbus SAS won a $1.9 billion order in August from Xiamen Airlines of China for 25 craft. Boeing delivered 25 planes to foreign buyers in July, up from 21 in June. Last month, overseas deliveries rose to 30.

GE, Deere

GE projects that as much as 60 percent of sales may come from outside the U.S. within five years, from 50 percent now, as it sells electronics and engines to emerging markets such as India and China.

Deere, the world's largest farm-equipment maker, increased its full-year profit forecast last month after third-quarter earnings rose 23 percent on orders for tractors overseas. Deere's sales of machinery outside the U.S. jumped 30 percent.

The trade gap with China, the second-largest U.S. trading partner after Canada, increased 13 percent to $23.8 billion in July, second only to the record $24.4 billion reached in October 2006.

Trade with China has become a politically sensitive issue as some policy makers and manufacturers say that country has kept its currency, the yuan, artificially low to stimulate demand. Treasury Secretary Henry Paulson has urged China to let its currency rise more.

China reported today that its trade surplus in August widened 33 percent to $24.97 billion from a year earlier, the second-highest monthly total. The surplus with the U.S., $15 billion, accounted for more than half the total. The figures reported by China and the U.S. don't match because of differences in methodology.

Oil Prices

Oil imports will remain a concern as prices continue to climb. The cost of imported petroleum surged 7 percent in July after a 4.4 percent gain the prior month, Labor Department figures show. Prices have increased even more since.

After eliminating the influence of prices, which are the trade numbers used to calculate gross domestic product, the deficit narrowed in July to $53.5 billion, the lowest since September 2004.

Economists at Lehman Brothers Holdings Inc. forecast trade will contribute 0.4 percentage point to GDP this year and 0.3 percentage point in 2008, after subtracting 0.1 last year.

"Still-strong global growth seems likely to provide a powerful offset both to overall growth and to corporate profits," Richard Berner, chief U.S. economist at Morgan Stanley, said in a note to clients yesterday. "Strong demand abroad will buoy U.S. growth."

Some European officials are also upbeat.

"The global economy has solid fundamentals," European Central Bank President Jean-Claude Trichet said at a press conference in Basel, Switzerland, yesterday. While uncertainties 'have augmented' after turmoil in financial markets, the overall sentiment that the world economy remains sound 'hasn't altered.'