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May Trade Deficit Second Lowest in Nearly Three Years

July 15, 1988

WASHINGTON (AP) _ The United States recorded a $10.9 billion trade deficit in May, the second smallest imbalance in almost three years, the government said Friday in a report that sent the dollar soaring on foreign exchange markets.

The Reagan administration and private economists were in agreement that the Commerce Department report offered conclusive proof that the government’s efforts to deal with one of the country’s biggest economic problems, a seemingly intractable trade imbalance, were beginning to show results.

The May deficit was actually $627 million higher than a revised April imbalance of $10.3 billion. But the April figure was the smallest imbalance since a $9.9 billion deficit in August 1985 and the May deficit was the second smallest imbalance since that time.

Financial markets, which had been braced for a higher deficit figure, rallied on the news. The dollar jumped sharply on foreign exchange markets, rising by almost one cent against the British pound and nearly one Japanese yen in London trading.

Commerce Secretary C. William Verity noted that for the first five months of this year, American exports have surged by 31 percent compared with the same period in 1987, reflecting the boom conditions in American manufacturing brought on by the weaker dollar.

″The merchandise trade figures for May are consistent with the trend toward a lower trade deficit,″ Verity said. ″The improvement in the trade balance in the first five months has been widespread geographically .″

The administration launched an effort three years ago with major U.S. allies to devalue the dollar as a way of making American goods more competitive on overseas markets.

But the strategy took much longer than expected to bear fruit, with continued huge deficits fueling protectionist fires in Congress. Last year, the trade deficit soared to an all-time high of $170.3 billion.

For the first five months of this year, however, the deficit is running at an annual rate of $140.7 billion, a $30 billion improvement, if it holds for the rest of the year.

″There can be no doubt that we have turned the corner in a big way on our trade deficit,″ said Allen Sinai, chief economist of the Boston Co.

U.S. exports climbed 2.3 percent in May to $26.6 billion, 31 percent higher than a year ago. This increase helped offset a 3.4 percent rise in imports, which climbed to $37.6 billion. The trade deficit is the difference between imports and exports.

Part of the increase in imports reflected a higher foreign oil bill, which jumped 17.7 percent to $3.9 billion in May.

Analysts said they looked for some further modest improvements in trade for the rest of the year, with some suggesting that the deficit would dip below $10 billion in coming months.

But Bruce Steinberg, an economist with the Merrill Lynch investment firm, said the bulk of the improvement in trade for this year has already occurred.

″Imports aren’t going to be falling because domestic demand is sufficiently strong to keep that from happening,″ he said.

The rise in imports in May reflected increases of $1.1 billion in industrial supplies and smaller rises in imports of capital goods. Imports of autos fell by $600 million during the month. Analysts said this provided evidence that the price increases caused by the weaker dollar were beginning to have an effect on domestic demand.

The increase in exports in May reflected a $300 million rise in agricultural shipments, a $300 million advance in sales of capital goods and a $100 million rise in sales of American autos and parts overseas.

By country, the biggest deficit, as usual, was with Japan, an imbalance of $4.1 billion, down slightly from the April imbalance of $4.4 billion. For the first five months of the year, the Japanese trade imbalance has shrunk by 11 percent over the same period a year ago.

The improvement in the deficit with Western Europe has been a much more substantial 47 percent over the same time period. For May, the deficit with the European Community totaled $1.9 billion.

The deficit with Canada, the largest U.S. trading partner, was $1.1 billion, while the deficit with the newly industrialized nations of South Korea, Taiwan, Hong Kong and Singapore was $2.4 billion in May.

The substantial trade improvement has been a key factor in the better-than- ex pected economic growth the nation has enjoyed so far this year. Boom times in manufacturing helped drop the U.S. unemployment rate to a 14-year low of 5.3 percent in June.

Many economists believe nearly half of the economy’s growth this year will come from an improving trade performance.

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