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Stocks plunge as U.S. trade deficit is wider than expected

By Ariana Eunjung Cha and Sonja Ryst
Washington Post Foreign Service
Thursday, August 12, 2010; A01

A wide-ranging sell-off on Wall Street sent stocks into the red for the year Wednesday after unexpectedly bad economic news from three continents reinforced fears that the global recovery is faltering.

In the United States, the Commerce Department said the trade deficit had widened 18.8 percent, to $49.9 billion -- a figure so large it sent economists scrambling to revise their growth forecasts for the quarter and predicting that unemployment may increase later in the year.

In China, which many had hoped would help save everyone else with its spending, the government statistics office released numbers showing that its economy was cooling rapidly. And in Britain, which had been a bright spot for the world economy in recent weeks, the central bank warned of a "choppy recovery" and scaled back its growth estimates.

The barrage of worrisome government data sent the Dow Jones industrial average down 265 points, or 2.5 percent from the previous day -- the worst daily decline in more than a month. All 30 component stocks were lower. The Standard & Poor's 500-stock index -- a broader measure -- sank 2.8 percent, and the tech-heavy Nasdaq composite index dropped 3 percent.

The steep decline in the U.S. markets followed falls in Europe, where key stock indexes slid between 2.1 and 2.7 percent, and in Asia, where Japan's Nikkei fell 2.7 percent.

The bond, commodities and currency markets were no less volatile. Investors drove yields on 10-year Treasury notes to one-year lows. They sold off oil, tin and copper. And they pushed the dollar to a 15-year low against the yen.

Investors were also reacting to the about-face by the Federal Reserve on Tuesday in its efforts to wind down aggressive measures to boost the economy. The Fed announced that it would use money from maturing mortgage-backed bonds to buy government bonds. The central bank hopes this will help cut interest rates on mortgages and other loans, which might increase borrowing and encourage growth.

While the fact that the Fed may be open to bolder steps if the economy weakens further could be seen as positive, investors took it as a sign that its confidence in the recovery had dimmed.

"The Fed didn't say anything to us to quell our concerns about the double-dip" recession, said Linda Duessel, equity market strategist at Federated Investors in Pittsburgh.

Peter Boockvar, an equity strategist for Miller Tabak, pointed out that Wall Street panics when the Fed does something and then panics because the Fed has to do something.

"If one of the Fed's goals in yesterday's statement was to instill confidence in the market that they will do anything to make things better, they accomplished the exact opposite in that today we are even more worried about economic growth not only by the recent data but by the constant desire on the part of the Fed to do something," Boockvar wrote in a research note to investors.

The Obama administration on Wednesday announced more aid for distressed homeowners and the signing of a bill that the White House said would help create jobs and strengthen manufacturing as a key driver of the economic recovery, but the moves did little to stop the sell-off.

The administration announced that it would allocate an additional $3 billion to distressed homeowners facing foreclosure: $2 billion to hard-hit states and $1 billion from the Department of Housing and Urban Development for $50,000 in emergency bridge loans for homeowners.

In a speech at the signing of the manufacturing bill, President Obama indirectly acknowledged the trade issue by reiterating his pledge to double exports and services over the next five years. "For too long we've been buying too much from the rest of the world when we should be selling more to the rest of the world," he said.

The Commerce Department said the trade deficit grew more than analysts expected in June after the stronger dollar made it easier for people in the United States to snap up cheaper exports from countries such as China. The gap widened to $49.9 billion in June, from a revised $42.0 billion in May. Economists had been expecting a smaller deficit after a recent drop in oil prices.

Imports rose to $200.3 billion in June from $194.4 billion in May as shoppers in the United States bought more consumer products, auto parts and other goods from overseas. Exports, meanwhile, fell to $150.5 billion from $152.4 billion. U.S. companies struggled to sell products such as industrial supplies, food and consumer goods to customers in foreign countries.

"This is another indication that the economy continues to slip," said Peter Cardillo, chief market economist at Avalon Partners in New York.

IFR Markets had expected a modest pullback in the trade deficit, down to $41.25 billion. In a report Wednesday, the research firm noted China's record June exports but added that the dollar's continuing strength in the wake of intensified euro-zone troubles pushed down petroleum prices. May's trade deficit unexpectedly jumped from $40.32 billion to $42.27 billion.

Economic data on the U.S. gross domestic product, unemployment and housing released in recent months point to a recovery that is slowing down. But economists don't agree on whether that means we're in danger of heading into another recession.

GDP -- the broadest measure of economic activity -- grew at an annual rate of 2.4 percent in the second quarter, down from 3.7 percent at the beginning of this year. The July jobs report showed that 181,000 discouraged workers dropped out of the labor force, leaving the unemployment rate steady at 9.5 percent.

Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Ore., said his team hasn't changed the risk exposure in its portfolio, which remains fully invested. "We still feel we're in the early to middle stages of an economic recovery," Dickson said, adding that the market typically goes through periods of higher volatility, jitters and pullback when it's in a recovery cycle.

He said that meaningful pullbacks are buying opportunities and the market between mid-August and September often sees bigger swings than normal because people are on vacation. The Fed's announcement was just a reason for traders to sell after they had built up nice profits in recent weeks, he said.

"Our best bet is that [the market will] go down for a day or two and then bounce back," he said.

Peter Morici, former chief economist with the U.S. International Trade Commission, estimated that the 2010 trade deficit solely with China would reduce the U.S. gross domestic product by more than $400 billion, or nearly 3 percent. He said oil and consumer goods from China account for nearly the entire trade deficit and that a sustained economic recovery is not possible without dramatic changes.

"Until the President tackles the root causes of the trade deficit, unemployment will remain near 10 percent and could surge much higher," Morici, a business professor at the University of Maryland, wrote in a research note.

"Inevitably, growth concerns in the U.S. will continue to translate into concerns about the broader global economic outlook," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Staff writer Frank Ahrens contributed to this report.

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