Dec 2006 Financial News

US trade deficit soars to record US$255b

Dec 19, 2006

WASHINGTON, United States (AP)

Pushed up by soaring oil prices, America's trade deficit surged to a record high in the summer, but analysts predicted a slowly improving imbalance in the months ahead.

The current account trade deficit increased 3.9 per cent to an all-time high of US$225.6 billion in the July-September quarter, the US Commerce Department reported Monday.

That third-quarter deficit was equal to 6.8 per cent of the total economy, up from 6.6 per cent of gross domestic product in the second quarter.

The current account is the broadest measure of trade because it tracks not only the flow of goods and services across borders but also investment flows. It represents the amount of money that must be borrowed from foreigners to make up the difference between imports and exports.

At current levels, the United States is borrowing more than US$2 billion a day from foreigners to finance the trade deficit.

Sharp declines

While foreigners have been happy to sell their cars, clothing and computers to Americans and hold dollars in return, the worry is that at some point the desire for dollar-denominated assets could weaken, triggering sharp declines in the value of the dollar and pushing interest rates higher.

Analysts noted that for the third straight quarter, foreigners earned more on their U.S. investments than Americans did on their foreign holdings, sending the deficit in investment flows to a record of US$3.8 billion.

The current account deficit is expected to hit a new record for the full year, far surpassing last year's record of US$791.5 billion al-though some analysts said they believed the third-quarter figure would represent the worst of the deficit numbers.

"Lower oil prices, robust export growth and some cooling in import growth should bring the deficit down, beginning in the fourth quarter," said Nigel Gault, an economist with Global Insight, a private forecasting firm.

He predicted the deficit would average around US$866 billion this year but shrink moderately to US$816 billion next year.

But imbalances at this level will still leave U.S. financial markets vulnerable to foreign investment patterns, economists said.

"The expected modest improvement in the current account deficit is not that encouraging since the overall shortfall will remain very large, keeping external financing risks elevated," said Michael Gregory, an economist at BMO Capital Markets Economics.

The increase in the shortfall last quarter was led by an US$8.1 billion rise in the deficit in goods. More than half the increase reflected a bigger foreign oil bill.

America's surplus in services, which includes such things as airline tickets, banking services and consultants' fees, rose by US$810 million to US$18.3 billion.

The category of unilateral transfers, which includes payments to foreign governments and individuals, rose by US$406 million to US$21.5 billion in the third quarter.

The Jamaica Gleaner
Tuesday, December 19, 2006.
http://www.jamaica-gleaner.com/gleaner/20061219/business/business1.html