U.S. Trade Gap Unexpectedly Narrows to $56.8 Billion

By Courtney Schlisserman

Aug. 12 (Bloomberg) -- The U.S. trade deficit unexpectedly narrowed in June as the biggest jump in exports in more than four years overcame record imports of petroleum.

The gap shrank 4.1 percent to $56.8 billion from a revised $59.2 billion in May that was smaller than previously estimated, the Commerce Department said today in Washington.

The increase in demand from overseas signals manufacturers like Caterpillar Inc. may be better able to withstand a slump in U.S. sales and an increase in oil prices. Slowing demand for imported goods excluding petroleum means trade will keep helping the economy after making its biggest contribution to growth in 28 years last quarter.

``This is decidedly good news for the U.S. economy,'' said David Resler, chief U.S. economist at Nomura Securities International Inc. in New York, in an interview with Bloomberg Radio. ``It shows that the U.S. economy is still deriving considerable strength from foreign trade,'' with gross domestic product in the second quarter probably growing ``well north of 2 percent.''

Economists had forecast the gap would widen to $62 billion from an initially reported $59.8 billion in May, according to the median of 71 estimates in a Bloomberg News survey. Projections of the deficit ranged from $58 billion to $65.7 billion.

A weaker dollar has helped stoke American exports. The currency has slumped 24 percent versus the euro in the past five years. The dollar has recouped some losses in the past four weeks as the outlook for Europe's economy dimmed. It was little changed after today's figures, at $1.4941 at 8:40 a.m. in New York.

Biggest Since 2004

Exports increased 4 percent, the biggest percentage jump since February 2004, to $164.4 billion, led by record overseas sales of food, industrial supplies, capital goods and consumer goods.

Imports rose 1.8 percent to $221.2 billion after increasing 0.3 percent in May. The import figures reflected a record $44.5 billion in purchases of foreign petroleum as well as record purchases of industrial supplies from overseas and increased demand for foreign-made autos and parts.

A barrel of imported crude oil cost $117.13 in June, up from $106.28 the previous month.

Price Changes

After eliminating the influence of price changes, the trade deficit narrowed to $39.1 billion, the lowest since December 2001, from $43.5 billion in May. Those are the numbers used to calculate gross domestic product and may prompt economists and the government to increase their estimates of second-quarter growth.

Excluding the effect of prices, non-petroleum imports declined during June.

``You've got a weak economy so businesses aren't importing as much and consumers aren't buying as many goods,'' Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, said before the report.

Commerce estimated on July 31 that the narrowest trade deficit in seven years added 2.42 percentage points to growth, the most since 1980, and prevented the U.S. economy from shrinking in the second quarter. Excluding the effect of trade, the economy would have contracted at a 0.5 percent pace, instead of expanding 1.9 percent.

The trade gap with China widened to $21.4 billion from $21 billion in the prior month.

Boost Exports

Some U.S. lawmakers accuse China of keeping its currency undervalued to boost exports.

U.S. Treasury Secretary Henry Paulson, writing this month on the Web site of Foreign Affairs magazine, said yuan strengthening still has ``much further to go.'' Of the advance since a fixed-exchange rate ended in July 2005, Paulson said 70 percent has come about after he initiated semiannual economic talks with China in 2006.

The deficit with the Organization of Petroleum Exporting Countries expanded by $200 million to a record $18.1 billion.

The U.S. trade deficits with Canada, Japan and the European Union widened. The gap with Mexico shrank as exports to that country reached a record.

U.S. manufacturers have received a boost from export orders as economies overseas grew and the dollar weakened.

Caterpillar, the world's largest maker of earthmoving equipment, said July 22 that second-quarter profit climbed 34 percent, helped by demand in China and the Middle East. Developing markets this year may grow more than six times as fast as in North America, where the U.S. may find it hard ``to avoid a recession,'' Chief Executive Officer Jim Owens said in a statement.

Dollar's Rebound

As economic growth in Japan, Germany and other major trading partners weakens and the dollar rebounds, the outlook for exports has softened. The trade-weighted dollar index yesterday rose to the highest level since February.

Harvard University economist Martin Feldstein, a member of the committee that charts the American business cycles, said yesterday the U.S. dollar is cushioning the slowing in the economy and the currency has further to fall.

``Market pressures over time are going to put downward pressure on the dollar,'' Feldstein, who retired in June as president of the National Bureau of Economic Research, said in a Bloomberg Radio interview. ``A more competitive dollar has been the driving force in keeping'' gross domestic product expanding.

The Institute for Supply Management's index of new export orders for manufacturers fell to 54 last month, the lowest level this year. Fifty is the dividing line between expansion and contraction.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net