U.S. Trade Deficit Drops--Possible Turnaround Seen

WASHINGTON â€”  The U.S. foreign trade deficit narrowed substantially in August to $13.3 billion from July’s record $18 billion, the Commerce Department reported Tuesday, suggesting that the worst may be over for American manufacturing firms that have been hurt by a flood of imported goods.

Despite the improvement, however, the U.S. trade gap still is expected to reach as much as $170 billion this year, well in excess of last year’s record $148.5-billion deficit.

“We finally may be seeing the long-awaited trade turnaround,� said Robert Wescott, an economist at Wharton Econometrics in Philadelphia. “There is also all kinds of other evidence--from Chrysler exporting mini-vans to Europe to Honda deciding to make engines in Ohio--to suggest that the weaker dollar is beginning to make our manufacturing industries competitive again.�

The generally weaker dollar, which has fallen steadily against several major foreign currencies for more than a year, helps bolster American firms by making U.S. goods less costly abroad and by pushing up the price of imported products here.

The improvement in the trade deficit had the effect of halting the recent slide in the value of the dollar on currency markets. A highly valued dollar aggravates the trade gap by adding to the price of U.S. goods in competition with foreign products. Currency traders, anticipating that the United States might intervene in currency markets to force the dollar down, had themselves driven the dollar to its lowest level in years.

The trade turnaround comes as welcome news to the Administration, which has been anxiously awaiting some tangible evidence that the dollar’s decline would narrow the trade gap enough to ward off protectionist legislation in Congress and an election onslaught from Democrats in November.

“The sharp improvement from July to August may be the turning point in our trade deficit,� said Commerce Secretary Malcolm Baldrige.

But several economists warned against declaring victory on the basis of just one month’s trade statistics.

“Before we can say our trade problems are behind us,� said Ronald Utt, an economist for the U.S. Chamber of Commerce, “we will need to see another couple of months of figures around the August level.�

And Ira Kaminow, chief economist at Government Research Corp., cautioned that trade figures often “follow a sawtooth pattern. The best we can say is that the underlying trade deficit appears to have flattened out. Any real improvement still remains in the future.�

Less Positive Signs

Meanwhile, other less crucial economic indicators continued to signal sluggish economic growth, with the government’s chief barometer of future economic activity falling 0.2% and sales of new single-family homes dropping 13% to a seasonally adjusted annual rate of 594,000.

The Commerce Department’s index of leading indicators, after rising by a revised 1% in July, fell by 0.2% to 179.1. The preliminary index is calculated from 11 different indicators, with the year 1967 equaling a base of 100.

Without a sharp decline in textile prices caused by an abrupt drop in government price supports for cotton, however, the index would have risen 0.1%.

Moreover, economists generally discount the importance of the leading indicators unless the index moves in the same direction for three months in a row.

On the trade front, the big improvement came from a drop in imports rather than any gain in exports. Imports fell by 13.5% to $30.9 billion, more than offsetting a modest 0.6% decline in exports to $17.6 billion.

In addition, the revision of the record July trade figures, based on later government data, brought that month’s deficit down from $18 billion to $16.1 billion. The revision for August will be released at the end of October.

Drop in Manufacturing Imports

Economists were most heartened by August’s across-the-board dip in manufacturing imports, which bolstered the arguments of those who are convinced that the weak dollar is finally beginning to push up the price of foreign goods enough to divert purchases to domestic firms. Imports of manufactured goods dropped 13.8%, with imports of Japanese cars falling by 27.5% and imports of computers, telecommunications equipment and electrical machinery all down significantly.

And after a nearly unprecedented three consecutive months’ agricultural trade deficit, exports of U.S. farm goods rose 10.7% to produce a $132-million surplus.