In what has become a regular occurrence, the U.S. trade deficit with the rest of the world swelled in June to a new record--$24.6 billion--as consumers' appetite for imported goods surpassed rising foreign demand for American exports, the Commerce Department reported yesterday.
The size of the gap surprised economists, who correctly anticipated a rise in U.S. exports but were caught off guard by the increased demand for imported cars, cellular phones and computer parts on the part of American consumers and businesses.
The dollar, the stock market and the bond market all dropped in response. The dollar weakened yesterday on the news to a seven-month low against the Japanese yen, and was quoted at 111.60 yen, down from 111.83 yen on Wednesday, raising inflation fears in the financial markets because a falling dollar increases the cost of imported goods. The Dow Jones industrial average fell more than 100 points in early trading before recovering; it closed down 27.54 points at 10,963.84. The 30-year Treasury bond fell $4.06 1/4 per $1,000 in face value, while its yield rose to 6.03 percent from 6.00 percent on Wednesday.
The dollar has been falling in recent weeks against the Japanese yen, in part because of perceptions that Japan's economy is beginning to recover from its deep recession and also because of fears about rising U.S. interest rates. If global investors choose to move some of their investments out of the United States into Japan or Europe, U.S. interest rates would have to rise to attract buyers. Rising rates would likely slow economic growth, which may make U.S. investments less attractive, putting pressure on the dollar.
The June deficit was "a horrific number," said William Dudley, an economist at Goldman Sachs Group Inc. "The wider trade gap increases the risk of dollar weakness and worries about inflation."
The $24.6 billion shortfall was considerably above the $21 billion average expected by analysts and more than $3 billion higher than a revised $21.17 billion shortfall in May. While the United States' trade deficits with Japan and China continue to widen in line with recent trends, the trade gap with Western Europe ballooned by 39 percent.
Behind the overall increase was a 3.9 percent rise in imports to $103 billion, the first time they have surpassed $100 billion in a single month. Exports increased slightly to $78.4 billion, led by gains in exports of cars, food and industrial supplies.
Through the first half of the year, the trade deficit is running at an annual rate in excess of $236 billion, compared with $164.3 billion for all of last year.
The trade deficit is an economic measure that draws varied analysis from economists. In the view of Dudley and others, burgeoning trade deficits cannot be endured long term because they must be financed by inflows of foreign capital in the form of purchases of U.S. stocks and bonds.
"We are borrowing as a nation to consume so it does raise a long-term financing question," said Clyde Prestowitz Jr., president of the Economic Strategy Institute. But Prestowitz acknowledged that people have been warning of a calamity from a growing trade deficit since the early 1980s, when the shortfall was about a tenth as large as it is now.
But there is another view held by some economists who see the current size of the deficit as a reflection of U.S. prosperity, and who say that American consumers' huge demand for cheaper foreign goods has helped keep inflation in check during a long expansion.
"The surge of U.S. imports is healthy for the world economy," said KeyCorp economist Ken Mayland. "Imports are acting as a safely valve for the U.S. economy, venting powerful domestic demand pressures, thereby thwarting the return of inflation."