July 14, 2010 in Business

Jump in trade deficit brings dire warnings

U.S. economic recovery is at risk, expert says
Don Lee Tribune Washington bureau
 
Yearly total

The trade deficit for the first five months of this year totaled $197.8 billion – a 38 percent increase from the January to May period of 2009.

WASHINGTON – The U.S. trade deficit jumped unexpectedly in May to the highest level since November 2008, prompting some analysts to cut their second-quarter economic growth forecasts sharply and economists to warn of rising risks of a double-dip recession.

The Commerce Department said Tuesday that the trade gap rose to $42.3 billion in May, up nearly 5 percent from April’s $40.3 billion. Economists had expected the May deficit to dip slightly to about $39 billion, as oil prices were lower and retail sales fell that month.

But American purchases of foreign-made computers, machinery and particularly household goods, notably from China, increased significantly in May. Analyst Diane Swonk attributed much of the surprising import gains to stockpiling by retailers and producers who are fearful of a potential trade war with China.

“This is a distortion; it’s not reflective of domestic demand,” said Swonk, chief economist at Mesirow Financial in Chicago, referring to the higher deficit in May. She added that the report was disturbing because it points up the political and economic risks weighing on the economy.

Macroeconomic Advisers, a major forecasting firm based in St. Louis, slashed its estimate of gross domestic product growth in the second quarter by 0.8 of a percentage point to a weak 2.4 percent annual rate. GDP, a measure of total economic output, grew by 2.7 percent in the first quarter.

“Now, a rising trade deficit and continued weakness among regional banks threaten to derail the recovery,” Peter Morici, a University of Maryland professor and former chief economist at the U.S. International Trade Commission, wrote in an analysis following Tuesday’s report.

Other analysts worry that persistent high trade deficits are resulting in increased borrowing to finance purchases as well as a buildup of unsold domestically produced goods, which in turn could lead to reduced work hours or layoffs. Soaring deficits financed by cheap money from abroad contributed to the latest recession.

The recession sharply reduced the U.S. trade gap, with imports falling faster than exports. But in recent months, as the U.S. economy has turned a corner, the deficit has been widening again.

Get stories like this in a free daily email


Please keep it civil. Don't post comments that are obscene, defamatory, threatening, off-topic, an infringement of copyright or an invasion of privacy. Read our forum standards and community guidelines.

You must be logged in to post comments. Please log in here or click the comment box below for options.

comments powered by Disqus