Bloomberg News

Trade Gap in U.S. Shrank in October to Lowest This Year

December 11, 2011

(Updates with consumer sentiment in fifth paragraph and exports to Japan in 13th.)

Dec. 9 (Bloomberg) -- The trade deficit narrowed in October to the lowest level of the year, reflecting a drop in imports that will help give the U.S. economy a lift.

The gap shrank 1.6 percent to $43.5 billion, smaller than projected, from $44.2 billion in September, Commerce Department figures showed today in Washington. Purchases from overseas fell to the lowest level since April, due almost entirely to a plunge in demand for petroleum.

Imports of capital goods, like computers and aircraft, and consumer goods climbed, showing spending by American companies and households is keeping the economy growing. Exports to China and South and Central America reached records, indicating demand from developing nations that is benefiting companies like Dow Chemical Co. may cushion the U.S. from any slowdown in Europe.

“We are seeing some resilience in U.S. demand,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who projected a gap of $43.6 billion. “Outside of Europe, demand is holding up in the face of this uncertainty. U.S. exports are going to remain in pretty good shape next year.”

Another report today showed confidence among consumers rose in December to a six-month high, more than forecast. The Thomson Reuters/University of Michigan preliminary sentiment index increased to 67.7 this month from 64.1 at the end of November. The gauge averaged 89 in the five years leading up to the recession that began in December 2007 and ended in June 2009.

Stocks rose after European leaders agreed to boost a rescue fund and tighten budget rules to stem the region’s debt crisis. The Standard & Poor’s 500 Index climbed 1.4 percent to 1,251.36 at 11:15 a.m. in New York. Treasury securities fell, sending the yield on the benchmark 10-year note up to 2.01 percent from 1.97 percent late yesterday.

Survey Results

The median forecast in a Bloomberg News survey of 80 economists projected the deficit to rise to $43.9 billion from a previously reported $43.1 billion in September. Estimates ranged from deficits of $40.3 billion to $46 billion. The government revised the September gap up to $44.2 billion.

Imports decreased 1 percent to $222.6 billion from $224.8 billion in the prior month. The value of crude oil purchases dropped to $26 billion, the lowest level since February, from $28.3 billion.

Excluding petroleum, the trade shortfall widened to $19.1 billion from $17.6 billion in September.

Exports fell 0.8 percent to $179.2 billion, the second- highest on record, reflecting a drop in gold shipments after they surged in September. Overseas sales of capital goods, including drilling equipment and generators, climbed to a record, as did foreign purchases of petroleum products.

Boosting Growth

After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit shrank to $44.2 billion from $45.9 billion. October’s reading compares with a third-quarter average of $46 billion, indicating trade may contribute to growth in the last three months of the year.

Trade added 0.5 percentage point to economic growth in the July-to-September quarter. The economy expanded at a 2 percent annual rate in the period.

The trade gap with China was little changed at $28.1 billion, as both imports and exports climbed. Sales to Japan rose to the highest level since 1997.

The dollar has fallen 11 percent since a post-recession peak in June 2010 against the currencies of six major trade partners as tracked by IntercontinentalExchange Inc.’s Dollar Index. The drop makes American goods cheaper abroad and is spurring manufacturing, which expanded in November at the fastest pace in five months, according to the Institute for Supply Management.

Export Demand

Manufacturers benefiting from overseas demand include Dow, the largest U.S. chemical maker. The Midland, Michigan-based company is prepared for “slower and jagged” global growth next year, and “exports have actually stood fairly strong for Dow” in Asia, according to Chief Financial Officer William Weideman.

“The U.S. and Western Europe will continue to see slow growth for the next several quarters due to high unemployment, weak construction markets, and lower consumer confidence due to the sovereign debt concerns,” Weideman said in a Dec. 6 conference call with investors. “This will be offset by ongoing resilience in the emerging geographies.”

U.S. exports, a driver of the expansion, will advance in 2012 even as a sovereign-debt crisis pushes Europe into recession, according to Joseph Carson, director of global economic research at AllianceBernstein LP. Faster growth in developing markets will help offset a slowdown in the euro area, whose share in exports has dwindled to 13 percent.

Restocking Inventories

Imports also may keep climbing as gains in consumer spending, which accounts for about 70 percent of the economy encourage companies to replenish shelves. Inventories at wholesalers rose in October by the most in five months as distributors moved to bring stockpiles in line with demand, Commerce Department figures showed yesterday.

China’s trade surplus with the U.S. remains an irritant in relations between the world’s two largest economies. President Barack Obama last month renewed pressure on China’s foreign- exchange policy and trade practices, saying “enough’s enough” on what the U.S. views as too-slow appreciation of the yuan.

China sees an increase in domestic costs and a slowdown in overseas demand putting “severe” pressure on its exports next year, a sign policy makers may have little appetite to allow faster gains in its currency. Premier Wen Jiabao’s embrace of higher wages, along with a jump in land and raw-materials prices and a stronger yuan, are restraining shipments, the Commerce Ministry said on Dec. 7.

--With assistance from Chris Middleton in Washington. Editor: Carlos Torres

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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