US trade problems stage a comeback
The hopes of the world's financial leaders for a peaceful spring were blown away yesterday by a setback in United States trade figures. The closely watched US trade deficit widened $1.4 billion to $13.8 billion, sending the stock and bond markets sliding. (See story, Page 32).
The White House and most economists said the trade deficit was still improving in spite of the setback. But the markets took the news badly as an indication that the trade problems of the US are not over.
Many analysts had expected that the lower-valued, more stable dollar would continue to close the gap between US imports and exports.
The deficit, the largest since October, led to concern among economists that interest rates would shift higher, and the dollar lower. But a sharp rise in imports reflected in the deficit indicates the robustness of the American economy, economists said.
On the foreign-exchange markets, the dollar slipped against the Japanese yen, West German mark, British pound, and other currencies despite open attempts to prop up the greenback by the Federal Reserve Bank in New York and at least five central banks in Western Europe.
``It was a bad trade number,'' said Michael Andrews, international economist at Irving Trust Company. ``I don't see anything good in it.''
Imports of foreign products - including manufactured goods, oil, and farm products - increased $2.3 billion in February. US exports also rose, but by a smaller $1.3 billion.
Commerce Secretary C. William Verity said in a statement that the figures were disappointing despite what he called an ``underlying favorable trend.''
Seeing the weakening dollar, William Cline, an economist with the Institute for International Economics in Washington, noted: ``It is basically an ironic commentary by the real world on the Group of Seven pronouncement that the dollar is just fine.''
Only Wednesday, finance ministers and central bank governors of the US and its six major trading partners reaffirmed their pledge to keep the international value of the dollar stable.
In a communiqu'e, the seven industrial nations repeated a statement of last December ``that either excessive fluctuation of exchange rates, a further decline of the dollar, or a rise in the dollar to an extent that becomes destabilizing to the adjustment process could be counterproductive by damaging growth prospects in the world economy.''
Also on Wednesday, an International Monetary Fund official had been discussing the predictions in that multilateral institution's spring look at the world economy. It foresees no worldwide recession and no boom this year or next.
IMF analysts predict only modest growth in world output - 3 percent in real terms in 1988 and '89, with growth decelerating a little in the industrial countries and picking up in the developing countries.
Economists do not expect the dramatic reaction of the markets to the trade news to substantially modify that generally positive outlook, particularly if the trade figures for subsequent months put the US balance of payments back on an improving path. Nonetheless, economists do see the market reaction as prompting these trends:
Higher interest rates in the US.
Scott Pardee, vice-chairman of Yamaichi International (America), expects the Fed to engage in ``further snugging'' in monetary policy.
With the US economy showing greater strength than most economists expected, the Fed has already tightened a little in the last few weeks. Mr. Pardee, a former high Fed official, presumes the Fed will put somewhat more restraint on the economy now.
One reason for the poor trade figures, economists say, was the strong demand in the US economy, prompting more imports.
Retail sales surged 0.8 percent in March, indicating consumer spending has resumed from a post-plunge slump. But a rise in interest rates could trim spending - and imports of foreign goods.
Despite central bank intervention to stabilize the dollar, its value could decline further. If so, imports and travel abroad will become more expensive. Mr. Cline suspects it may have to drop another 10 percent to remedy the trade deficit.
Mr. Andrews of Irving Trust says: ``I don't think the central banks can hold it completely.'' By buying the dollar on foreign-exchange markets, central banks may be able to slow down or delay the dollar's decline, he notes.
Robert Paul, chief foreign-exchange trader at the Bank of Boston, is more optimistic. ``These central bankers are really committed,'' he says. Mr. Paul expects them to hold the dollar within the same trading range of the past five or six months. - 1.65 to 1.70 for the German mark - for another few months. He's not so sure for the longer run.
The communiqu'e by the Group of Seven (G-7) did not spell out any precise exchange rates where these financial leaders wished to have the dollar stabilize. But various comments indicated they were thinking of about 125 yen and 1.65 marks to the dollar.
Neither, however, do the financial leaders of the G-7 (the US, Japan, West Germany, France, Britain, Italy, and Canada) want exchange-rate instability to upset the world economy by destabilizing financial markets. The October stock market crash is fresh in their memories. They do not want a repeat.
They are also aware that from a historic standpoint, the economic expansion in the world has already lasted a long time. In the US, it is the longest peacetime recovery ever. With elections ahead in the US and France, they do not want the boat rocked.
Cline argues that the trade news indicates the US will have to do more to trim its budget deficit and that Western Europe will have to further promote growth.
The IMF, in its world economic outlook, makes similar points. If the US, Japan, and Germany do not move more swiftly to correct their trade imbalances, another stock market dive could lie ahead, the IMF staff report implies. Deficit jolts Wall Street
The financial markets reacted quickly to yesterday's trade figures.
Stocks headed toward their second worst day of 1988, the dollar sank, and the bond market bombed after the government announced a $13.8 billion trade deficit in February.
On the New York Stock Exchange, concern about higher interest rates pushed the Dow Jones industrial average down 101.46 points yesterday to close at 2005.68, according to preliminary figures.
The large drop triggered a suspension of computerized program trading. It was the second time the ``collar'' on automatically executed orders had been used. The limits were designed after the October plunge to calm the market when it moves more than 50 points in either direction in a day.
``This situation certainly has its similarities with last October,'' argues Robert Brusca, chief economist with Nikko Securities International in New York. ``Growth is too fast for the bond market, which worries about a recession. But it's too slow for the stock market, which wants a rejuvenation in the economy. I've been looking for something of a correction, and perhaps a major one,'' Mr. Brusca says.