The trade deficit fell in May, reflecting a rise in U.S. exports to the highest level in history and a temporary decline in foreign oil prices. But the improvement was likely to be short-lived because of rising oil prices.
The Commerce Department said Wednesday that the trade deficit declined to $55.3 billion in May, an improvement of 2.7 percent from April.
Even with the narrowing of the overall deficit in May, it is running at an annual rate of $681.6 billion through the first five months of the year, compared with $617.6 billion for 2004..
"There is no question that the deficit this year will be worse than last year. A number of the improvements in May were temporary," said Nariman Behravesh, chief economist at Global Insight, a Massachusetts-based economic forecasting firm.
Analysts noted that while oil prices declined in May, fears about adequate supplies have sent prices above $60 a barrel.
The deficit with China rose to $15.8 billion, the highest since last November, pushed upward by a 12.8 percent surge in imports of Chinese clothing and textiles. In the first five months this year, Chinese clothing and textile shipments are up 53.6 percent from the comparable period in 2004.
The administration has recently toughened its stance with China. It reimposed quotas to stem a flood of Chinese textile and clothing imports and is pressuring China to crack down on copyright piracy and to revalue its currency.
But private economists think there is little chance China will allow more than a modest increase in the yuan's value, which means China's currency and that of other Asian currencies will likely remain undervalued against the dollar. If there is no change, Asian products will remain cheaper in America and American products will be more expensive in China.
For that reason, analysts are forecasting that the trade deficit will remain at record levels, raising concerns about the U.S. ability to continue depending on foreigners to hold ever-larger amounts of American dollars and dollar-denominated assets.
Should foreigners decide to reduce or even slow the rate of increase in their dollar holdings, it could mean a sharp fall in the value of the dollar, falling stock prices and rising interest rates.
None of those problems is evident yet. While the dollar is off its highs of early 2002, the decline has been gradual and in recent months the dollar has been rising in value.
"We don't seem to be having any trouble financing our large and growing trade deficits," said David Wyss, chief economist at Standard & Poor's in New York.