updated 12/17/2007 6:08:54 PM ET 2007-12-17T23:08:54

The U.S. trade deficit declined during the third quarter to the lowest level in two years, raising hopes that America's trade troubles could be easing.

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The Commerce Department reported Monday that the current account trade deficit fell by 5.5 percent to $178.5 billion in the July-September quarter. That was a better-than-expected showing and the smallest current account imbalance since a $173.4 billion deficit in the third quarter of 2005.

The current account is the most comprehensive measure of trade because it includes not only trade in products and services but also investment flows between countries.

The current account deficit had set all-time highs for five consecutive years but has declined for two consecutive quarters, prompting economists to predict that this year will see the deficit finally start to decline.

"The combination of slower growth in U.S. demand, solid growth in overseas economies and a declining dollar has been pulling the trade deficit lower as exports have outstripped imports," said Nigel Gault, chief U.S. economist at Global Insight.

The improvement in trade is helping give badly needed support to a U.S. economy that is being battered at the moment by a prolonged slump in housing and a severe credit crunch.

President George W. Bush tried to reassure Americans about economic prospects on Monday, telling a Rotary Club audience in Virginia that while there are "definitely some storm clouds and concern" the underlying economy remains in good shape.

Wall Street extended last week's losses on Monday as investors remained worried about flagging growth and rising prices. The Dow Jones industrial average fell 172.65 points to close at 13,167.20.

The trade improvement reflects in part the decline of the dollar against many other major currencies. A weaker dollar makes U.S. products cheaper in foreign markets while making foreign goods more expensive for American consumers.

The deficit in goods shrank by 2.2 percent to $199.7 billion in the third quarter as record levels of export sales helped offset a rising foreign oil bill.

The surplus in services, items such as airline tickets and consulting fees, increased by 3 percent to $26.5 billion. The surplus in investment income flows surged by 61.5 percent to $20.5 billion. The only deterioration occurred in the category that includes foreign aid, which rose to $25.8 billion, up from $23.2 billion the previous quarter.

The decline in the current account deficit left it a 5.1 percent of the country's total economic output, down from 5.5 percent from the second quarter. That was the lowest level in terms of GDP since the first quarter of 2004.

The government reported last week that the monthly deficit in just goods and services rose in October to $57.8 billion, reflecting record oil prices and a record deficit with China. While it was the highest monthly imbalance since July, economists are still looking for the deficit for the year to decline as American manufacturers see export gains from the weaker dollar and stronger growth overseas.

However, the U.S. trade deficit with China is running at a higher rate than a year ago, putting it on track to surpass last year's record and setting off a backlash in Congress, where many lawmakers are demanding that the United States impose economic sanctions on Chinese goods for what they see as unfair trade practices such as China's manipulation of its currency to gain trade advantages.

Treasury Secretary Henry Paulson led a delegation of Cabinet officials to China last week for the third round of high-level talks, but those discussions failed to achieve any breakthrough on the currency issue.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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