December 14, 2005

U.S. Trade Deficit Hits New Record of $68.9 Billion

By JENNIFER BAYOT

The United States trade deficit reached a new high for the second consecutive month, the Commerce Department reported today, widening to a record $68.9 billion in October as oil imports far outpaced exports of capital goods like airplanes.

The unanticipated widening in the trade gap is likely to dampen economic growth in the fourth quarter, and it suggests that the problems caused by the hurricanes in September have taken a larger-than-expected toll.

The nation's trade deficits with China, Europe, Mexico, Canada and members of the Organization of the Petroleum Exporting Countries all reached new highs based on record levels of imports. Imports from South American and Central America rose to a record as well.

Over all, the trade deficit rose 4 percent, or $2.9 billion, in October, from a record $66 billion in September. Combined with another large increase in September, the deficit has grown by $10 billion in the past two months alone.

Together, the trade deficit's sharp back-to-back increases more than erase the declines that economists found promising earlier this year, including a dip to $54 billion in March. The $68.9 billion deficit was well above the $62.9 billion forecast of economists polled by Bloomberg News.

The widening trade gap weighed on the dollar, which continued to fall against the Japanese yen and the euro.

But prices of Treasury securities rose after a separate government report showed that prices of imported goods had fallen more than expected last month, by 1.7 percent since October. Bond traders saw this report as a sign of easing inflationary pressures that could possibly encourage the Federal Reserve to take a break from its steady increases of short-term interest rates.

Economists at Morgan Stanley said the October trade deficit was "much worse than expected" and they lowered their estimate of fourth-quarter economic growth to 3.0 percent, from 3.4 percent, on expectations that the United States would be increasingly reliant on imports.

The initial expectations of a narrower trade deficit in October were based on the assumption that several unusual circumstances in September would no longer apply, said Joshua Shapiro, chief United States economist at MFR Inc. in New York. A strike at Boeing had hurt aircraft exports, the closure of the Port of New Orleans after Hurricane Katrina had hurt agriculture exports, and emergency imports of gasoline and natural gas were replacing temporarily shuttered domestic supplies

Instead, a surge in imports more than offset gains in exports, and aircraft exports grew by less than they had fallen in September: although the end of a strike at Boeing helped bring about a $1.8 billion bounce in exports - to $107.5 billion - imports grew $4.7 billion, to $176.4 billion.

Higher energy prices accounted for about two-thirds of the $2.9 billion jump in the trade deficit, with the trade gap in petroleum rising by $1.9 billion. The culprit was not the price of oil, which declined in October, but the country's demand for imports to compensate for the domestic production depleted by this year's hurricanes, said Nigel Gault, chief United States economist at Global Insight, a research firm in Lexington, Mass.

Mr. Gault added that the trade deficit would be "a substantial drag on growth in the fourth quarter" and that the deficit's back-to-back records "have undermined hopes that the trade gap might be stabilizing." While petroleum imports should fall next year, the trade deficit in services and other products appears poised to trend higher, and the value of the dollar will fall in response, Mr. Gault said.

"November will be better, but the past year's flat trend in the core deficit seems to be breaking," said Ian Shepherdson, chief United States economist at High Frequency Economics.