February 10, 2006

U.S. Trade Deficit Hit All-Time High in 2005

The United States trade deficit jumped nearly 18 percent in 2005, the government reported today, hitting its fourth consecutive record as consumer demand for imports increased and energy prices soared.

The $725.8 billion gap, which is almost exactly twice the deficit in 2001, was driven by a 12 percent jump in imports and a more muted 10 percent increase in exports, the Commerce Department reported. The nation last had a trade surplus, of $12.4 billion, in 1975.

As a percent of the gross domestic product, the trade gap increased to 5.8 percent from 5.3 percent in 2004 and 4.5 percent in 2003.

With the American economy continuing to grow faster than many of its export markets and energy prices staying at elevated levels, economists expect little improvement, and perhaps even a slight worsening, in the national trade balance this year.

"The pace of that widening will be moderating to some extent," Dean Maki, chief United States economist at Barclays Capital, said noting that exports to Europe, Japan and other countries are growing. But "you need a dramatic slowdown in domestic U.S. demand to bring down the U.S. trade deficit and we think that is unlikely."

In addition to being improbable, such a deceleration would be extremely painful to workers and businesses. To an extent, the nation finds itself in an arithmetic hole that it will not be able to simply export its way out of. Imports are now one and a half times bigger than exports and it would take a substantial and sustained growth in sales of American goods and services overseas to make up that difference.

That means the country will have to rely on the flow of billions of dollars in foreign money, particularly from central banks in Asia, into American financial markets for some time to come. China and Japan are the biggest holders of United States Treasury bonds. Their purchases help finance the federal budget deficit and allow Americans to buy homes with cheap mortgages and to consume large quantities of imports, many of them from Asia.

Many economists believe that situation is unsustainable in the long run and the United States will eventually face a harsh correction that would depress consumer spending, increase the cost of borrowing and result in a weaker currency.

"There is certainly going to be inflows, the question is at what price?" said James O'Sullivan, an economist at UBS. "As time goes on, it will become a little more difficult to attract foreign funds. That's another way of saying the dollar will fall."

The dollar strengthened against the euro, Japanese yen and British pound in 2005, making American exports more expensive and imports from those countries cheaper.

Bond prices fell today, pushing the yield on the 10-year United States Treasury to 4.59 percent, from 4.54 Thursday evening. The stock market was little changed in afternoon trading.

Perhaps one of the most important factors in the rising deficit is the import of oil and other energy sources. Trade in petroleum products accounted for 29 percent of the total deficit, up from 25 percent in 2004. Imports for petroleum goods climbed 39 percent, to $251.6 billion, after rising by 39 percent in 2004. Excluding oil and other petroleum products, the trade deficit would have grown 10 percent.

Though oil and other energy prices fell late last year, which helped lower petroleum imports in December, they have risen sharply early this year because of concerns about Iran's nuclear program.

In December, the nation saw a 1.5 percent increase in the deficit, to $65.7 billion, as imports of computers, cars and airplanes rose and exports of planes, which had risen sharply in November, dropped. The trade deficit in petroleum products narrowed by about $1.2 billion, but nonpetroleum imports increased by $2.3 billion, to $47.3 billion.

"We can expect to see worse numbers to come," said Ashraf Laidi, chief currency analyst for MG Financial Group in New York. "The simple reason is when there is a rise in oil prices that increase in oil price for a particular month does not tend to spill over into the trade deficit until the next month."

The nation set another record last year, this one in its politically sensitive trade deficit with China. That nation had the largest trade deficit with the United States of any country, at $201.6 billion for the year, up 24.5 percent from 2004. In December, the country's deficit with China narrowed 11.9 percent, to $16.3 billion.

Lawmakers in Washington have seized on the growing trade imbalance in China to call on the Bush administration to take a harder line with the country on its currency and other trade practices.

In July, the Chinese government adjusted the value of the yuan up by about 2 percent and allowed its currency to float in a narrow band. Since then it has risen by an additional 0.7 percent. One dollar buys about 8.0505 yuan today.

The United States' second biggest deficit was with Japan, at $82.7 billion, up 9.4 percent, followed by Canada, a big supplier of oil and natural gas, at $76.5 billion, up 15.1 percent. The deficit with members of the Organization of Petroleum Exporting Countries increased by 29 percent, to $92.7 billion.