[A-List] US economy: trade gap widens to record level

["Michael Keaney" <michael.keaney@xxxxxx>]

US trade gap at record $38.5bn in August
By Peronet Despeignes in Washington
Financial Times; Oct 19, 2002

The US trade deficit reached a new record in August as buoyant consumer
spending continued to suck in imports, according to official figures
yesterday.

Despite the figures, which highlighted weakness abroad and what some
economists consider a growing threat to the dollar and the US economy,
investors remained unworried. The dollar hardly moved and share prices
continued to rise, as they have for much of the past fortnight, on hopes of
a faster turnaround, with the Standard & Poor's 500 stock index, as of early
afternoon trade yesterday, set to cap its biggest seven-day rally in nearly
30 years.

The Commerce Department said the trade deficit grew to $38.5bn (ý24.8bn) in
August from a revised $35.1bn in July as exports fell for the first time in
six months and imports rose to their highest level this year. The deficit
has widened significantly this year as the economy has recovered faster and
more steadily than those of most of its main trading partners.

Many economists fear this means a growing risk of turmoil in financial
markets. The US must attract a net $1bn a day in foreign capital to sustain
it, and keep the dollar and equity markets from falling and interest rates
from rising.

Foreign investors are continuing to buy US assets on the basis that the US ,
for all its travails, remains a safer and better place to invest than most
alternatives. But concerns have been raised on the extent to which these
funds appear increasingly to be financing consumption rather than
investment.

The size of the broadest measure of the deficit, the current account, is
approaching 5 per cent of US gross domestic product - a level generally
associated with currency crises in other advanced nations and emerging
markets.

Some economists argue that the sheer dominance of the US economy and its
currency places it beyond the realm of such comparison, but a debate rages
among many economists about whether any future adjustment will be smooth and
gradual rather than abrupt and destabilising.

The Organisation for Economic Co-Operation and Development warned earlier
this week in its latest report on the US economy that the dollar could fall
as much as 40 per cent in inflation-adjusted terms because of the deficit,
but it was "very difficult to gauge" how such an an unwinding would occur.

Separately, the Labor Department said its consumer price index rose 0.2 per
cent in September after an increase of 0.3 per cent in August. Excluding
food and energy, the CPI rose only 0.1 per cent last month, suggesting
inflation remains low and steady. That has allowed the Federal Reserve to
keep short-term interest rates at 40-year lows to support a recovery that
remains quite shaky.

While recent figures suggest the housing sector remains strong, its
immediate future has been put in doubt by the recent rebound in long-term
interest rates. Other reports suggest US businesses continue to retrench,
keeping the recovery fragile and the job market weak.

Investors have lately dismissed such reports about the past, focusing
instead on the future - positive profit news and hopes that much of the
worst is over.