Recession Abroad Hikes US Trade Deficit

LAST month at the Economic Summit in Tokyo the Clinton administration asked its trading partners to stimulate their economies.

Now, it has additional evidence that lackluster growth abroad is hurting the giant United States economy.

Yesterday, the US Commerce Department reported the merchandise trade deficit in June swelled to $12.6 billion, the worst showing in six years. The numbers - which can be quite volatile - stunned economists who had been expecting a much lower figure.

"I must say this is a startlingly bad number," says Donald Straszheim, chief economist at Merrill Lynch & Co., who figures the government will now have to revise second quarter gross domestic product numbers down sharply.

The huge gap was caused by a 5.1 percent surge in imports and a 3.3 percent drop in exports. According to the Commerce Department figures, the import increase was in part due to the purchase of more foreign cars and consumer goods.

The trade deficit with Japan widened to $4.33 billion from $3.75 billion in May.

The trade deficit, Mr. Straszheim points out, "lends more credence to our appeals to both the Japanese and Germans to get their economies going." However, Straszheim adds there is little the administration can do over the short term other than talk.

The bad trade numbers are also likely to attract attention in Congress which will soon be debating the North American Free Trade Agreement (NAFTA). Yesterday, it was reported the president would name William Daley, son of the former Chicago mayor, to head his effort to get NAFTA through Congress. Mr. Daley has strong ties to the labor movement, which opposes the trade bill.

The huge deficit comes at the same time as the US dollar continues to slide against the Japanese yen. Yesterday, the dollar closed at 101.98 yen, up from its historic low of nearly 100.

Economists do not believe the US has an explicit "open mouth" policy of seeking a change in the currency values. "But we don't act like we are unhappy with it," says Bob Dederick, chief economist at Northern Trust Company in Chicago.

Mr. Dederick points out that the Federal Reserve in the US has not joined the Bank of Japan in fighting the dollar's slide. This is partly because the dollar's fall has been orderly and partly because the markets have expected the yen to appreciate.

The yen's rise reflects a strong trade surplus and the inclination of Japanese institutions to hoard any excess cash instead of investing it abroad. "It is partially because they [the Japanese] were burnt by some of their investments and partly because Japan is in a recession and the financial institutions are fighting to strengthen their capital positions," Dederick says.

Prior to June, the trade deficit was running at about a $100 billion annual rate. The US continues to import large quantities of oil, capital goods, and consumer products such as automobiles from Japan. In fact, the trade imbalances with Japan and the People's Republic of China continue to represent a significant portion of the deficit.

Another reason for the red ink, however, is low economic activity abroad. Most US trading partners, including Japan and much of Europe, are in a slump.

"It is just not a favorable environment for reducing the trade balance," says economist Sam Nakagama, who runs his own economic consulting firm.

At the same time the US economy is growing, thereby attracting more imports. "We're in a recovery, albeit a slow recovery," says Richard Rippe, chief economist with Prudential Securities.

This week the government reported that industrial production rose 0.4 percent in July, following small declines in May and June. "The figures were mildly encouraging," Mr. Rippe says.

A significant portion of the gain, however, was represented by increased electricity generation, reflecting the heat wave that stunned the eastern half of the country in July. And, housing starts were disappointing, falling 2.7 percent last month. The weakness was mainly in the West, indicating the California economy remains a drag.

The economic numbers released next week are expected to show this trend of slow growth continuing. The government will report durable goods orders, which are expected to drop about 2 percent and existing home sales which are expected to fall slightly as well.

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