updated 8/14/2007 8:55:33 AM ET 2007-08-14T12:55:33

The U.S. trade deficit dropped to a four-month low in June as record exports of farm goods and autos offset a jump in crude oil prices. Imports from China hit an all-time high despite recalls of tainted Chinese products.

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The Commerce Department reported Tuesday that the trade deficit dropped to $58.1 billion in June, a 1.7 percent decrease from May and the lowest imbalance since February.

The decline caught analysts by surprise. They had been looking for a small increase reflecting the fact that global oil prices have been rising.

U.S. exports and imports both set records in June. Exports of goods and services rose by 1.5 percent to $134.5 billion, reflecting big increases in the sale of farm products such as corn and meat and in semiconductor chips and autos. Imports also set a record, rising by 0.5 percent to $192.7 billion as both the amount of foreign crude oil rose to the highest level in nine months.

The Federal Reserve said at its meeting last week that it still saw the possibility that inflation will not moderate as the biggest threat to the economy. However since that meeting, financial markets have been roiled by problems in global credit markets. That has raised expectations among investors that the Fed will move in coming months to cut interest rates to make sure that widening credit problems don’t push the country into a recession.

Through the first six months of this year, the trade deficit is running at an annual rate of $705.5 billion, which is down 7 percent from the all-time high of $758.5 billion set in 2006.

Analysts believe that the deficit for the full year will show an improvement after five straight years of record imbalances. The belief is that a weaker dollar against the currencies of major trading partners plus stronger global growth will boost exports while a slowing U.S. economy will trim demand for imports.

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