US trade deficit threatens growth

US trade deficit threatens growth
By Andrew Balls in Washington
Published: December 14 2005 15:46 | Last updated: December 15 2005 01:56
Copyright by the Financial Times

The US trade deficit hit a new record in October, confounding Wall Street expectations forecasts that it would fall and suggesting trade will be a bigger-than-expected drag on economic growth in the fourth quarter.

The deficit in goods and services rose to a record $68.9bn in October, the Commerce Department reported, driven by imports of energy, cars and industrial goods.

Imports increased 2.7 per cent while exports rose 1.7 per cent.

The deficit was above the previous record of $66bn in September, disappointing confounding Wall Street expectations that it would drop to $63bn. Some economists have expected the tradedeficit to stabilise owing to the delayed impact of the dollar’s depreciation between 2002 and earlier this year.

The rise in the deficit came in spite of lower import prices. The Labor Department also separately reported on Wednesday that import prices dropped 1.7 per cent in the month, led by an 8 per cent decline in energy prices.

The deteriorating trade picture prompted several a number of economists to cut their fourth quarter forecasts for the growth rate in gross domestic product from about 3.5 per cent to 3 per cent. The rise in imports suggests that US demand growth remains strong, but more of it is being was met by foreign producers. The goods deficit with China – the cause of increasing angst to US politicians on Capitol Hill – rose from $20.1bn to $20.5bn.

The dollar continued a sell-off that had begun following a strong Tankan survey on business confidence in Japan.

Treasury bond prices increased – with the yield on the 10-year note dropping 8.8 basis points to 4.437 per cent in late morning trade – on the expectation that weaker growth and less imported inflation might mean the Federal Reserve is close to the end of its rate tightening campaign.

The Fed raised rates another quarter point to 4.25 per cent on Tuesday, but indicated that monetary policy has entered a new phase now that monetary policy is no longer obviously stimulating the economy. The statement said the Fed expected “some further measured policy firming” would be needed to keep growth close to trend and inflation pressures contained, but indicated that this would be dependent on the incoming economic data.