U.S. Trade Gap Narrowed 1.2% in May to $59.8 Billion

By Bob Willis

July 11 (Bloomberg) -- The U.S. trade deficit unexpectedly narrowed in May as the cheaper dollar spurred gains in exports, helping make up for the soaring cost of imported oil.

The gap between imports and exports shrank 1.2 percent to $59.8 billion from a revised $60.5 billion in April that was smaller than previously estimated, the Commerce Department said today in Washington.

Growth in overseas markets and a weaker dollar are helping lift exports even as oil prices, which reached a record last week, are pushing up imports. A shrinking trade gap is one of the few economic bright spots remaining as an extended housing slump and cooling consumer spending weigh on the economy.

``We're continuing to see that in foreign demand,'' boosted by a sinking U.S. currency, said Mike Feroli, an economist at JPMorgan Chase & Co. in New York. ``It looks like we'll get yet another quarter where foreign trade will contribute around a percentage point'' to gross domestic product growth, he said.

A separate government report today showed prices of imported goods rose 2.6 percent in June from the previous month, the same as in May. The Labor Department said import prices climbed 20.5 percent from a year before.

Economists' Estimates

The trade gap was forecast to widen to $62.5 billion from an initially reported $60.9 billion in April, according to the median estimate in a Bloomberg News survey of 74 economists. Deficit projections ranged from $59.5 billion to $65 billion.

Exports increased 0.9 percent to $157.5 billion, as sales of foods, aircraft and chemicals strengthened.

Imports rose 0.3 percent to $217.3 billion after increasing 4.6 percent the prior month. The import figures reflected a record $31.2 billion in purchases of foreign crude oil, before seasonal adjustments, as well as higher demand for capital goods and consumer items such as televisions, apparel and toys. Auto imports fell $842 million to $20.6 billion.

The cost of crude oil rose as high as $135.09 a barrel on May 22, according to pricing on the New York Mercantile Exchange, and last week reached a new record of $145.85.

Imports of industrial supplies declined by $332 million to $67.2 billion. Demand for consumer goods from abroad gained $1.5 billion to $41.7 billion.

After eliminating the influence of changes in prices, the trade deficit declined to $43.6 billion, the lowest since October 2002, from $46.7 billion. Those are the numbers used to calculate gross domestic product and may prompt economists to increase their estimates of second-quarter growth.

China Deficit Widens

The trade gap with China widened to $21 billion from $20.2 billion in the prior month. The deficit with the Organization of Petroleum Exporting Countries widened by $2.3 billion to a record $17.9 billion.

The U.S. trade deficits with Canada, Mexico, Japan and the European Union all narrowed, led by a $2.5 billion decline in the shortfall with Japan, to $5 billion. Exports to Canada and the EU reached record levels.

The economy probably grew 1.5 percent in the second quarter, as growing exports helped counter weakness in manufacturing and construction, according to a Bloomberg survey of economists taken the first week of July. The economy grew 1 percent in the first quarter, when net exports contributed 0.8 percentage point to the expansion.

About $78 billion in tax rebates through June probably gave consumer spending a boost in the second quarter, helping to spur purchases of foreign televisions and other consumer goods. Economists surveyed by Bloomberg forecast consumer spending rose 2 percent in the April-to-June period, compared with a 1.1 percent gain in the first quarter.

Growth Overseas

Faster growth overseas is spurring exports of U.S.-made goods, ranging from Boeing Co. aircraft, to mining and construction equipment, steel and grains. China's economy grew 10.6 percent in the first quarter from a year earlier. India's expanded 8.8 percent, Argentina's 8.4 percent and Brazil's 5.8 percent.

In response to growing demand from China, Caterpillar Inc., the world's biggest maker of earthmoving equipment, will build a factory in eastern China to make light hydraulic excavators for the world's largest earthmover market after the U.S.

``Our customers in China are demanding a greater variety of construction equipment,'' Mary Bell, Caterpillar's global vice president for construction machines, said in a statement June 30.

The deficit with China, which makes up the largest share of the U.S. trade gap, remains a political sticking point. Some U.S. lawmakers accuse China of keeping its currency undervalued to boost exports.

Treasury Secretary Henry Paulson on June 18 urged China to let markets play a bigger role in setting the value of the yuan, while acknowledging ``the recent increased pace of appreciation'' of the Chinese currency.

Dollar's Decline

U.S. exporters are also getting a boost from a weaker dollar, which was down 8 percent against a trade-weighted basket of currencies of major trading partners in the 12 months ended in May. The dollar is down by about 27 percent since February 2002, and that has pushed up prices of commodities.

Charlotte, North Carolina-based Nucor Corp., the largest U.S.-based steelmaker by market value, is working to keep up with surging demand from emerging economies, many of them profiting from gains in prices of oil and other commodities, Chief Executive Officer Dan DiMicco said on June 25.

``Because of the global shortage of steel, we have a strong ability to export,'' DiMicco said in an interview in New York. Demand for steel and other commodities is in a ``30-plus-year bull market,'' he said, as emerging economies including China and India expand infrastructure.

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net