updated 6/10/2010 4:08:22 PM ET 2010-06-10T20:08:22

The U.S. trade deficit rose to the highest level in 16 months as exports fell for the second time in three months, a potentially worrisome sign that Europe's debt troubles are beginning to crimp American manufacturers.

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The Commerce Department said Thursday the trade deficit widened to $40.3 billion in April, up by 0.6 percent from March. U.S. exports dropped 0.6 percent, while imports declined by 0.4 percent.

U.S. manufacturing has been a standout performer as the U.S. recovers from the worst recession in decades. But the concern is that Europe's debt crisis will slow growth in that part of the world and dampen demand in a key U.S. export market.

For April, exports slipped to $148.8 billion, with demand for U.S. farm products falling by $647 million and weakness spread across a number of manufactured goods from electric generators to industrial machinery and aircraft engines.

Imports edged down to $189.1 billion, with demand for oil basically unchanged from March while total consumer goods imports dipped by $741 million. The biggest decline came in pharmaceutical products.

Many economists are worried that Europe could fall into a double-dip recession. That will dampen demand for U.S. exports in a region that accounts for about 15 percent of U.S. exports.

American sales are also threatened by the fact that the euro, the common currency of 16 European nations, has fallen in value against the dollar as investors, worried about possible defaults in countries such as Greece, have fled to the safety of dollar-denominated investments.

"Although solid growth in the emerging nations and Canada should support U.S. exports this year, a rising dollar and struggling European economy suggest trade will no longer act as a tail wind for the U.S. recovery," said Sal Guatieri, senior economist at BMO Capital Markets.

Earlier this week, the dollar reached a four-year year high against the euro. A stronger dollar and a weaker euro hurts America's trade balance with Europe by making U.S. products more expensive in European markets and European products cheaper for U.S. consumers.

Nigel Gault, chief U.S. economist at IHS Global Insight, predicted that the dollar's rise would dampen exports in coming months. He forecast that a higher trade deficit would shave about 0.5 percentage point to perhaps as much as a full percentage point from growth in the April-June quarter, reflecting the fact that the rebounding U.S. economy is pulling in more imports.

Gault predicted that the overall economy, as measured by the gross domestic product, will still grow at a healthy pace above 4 percent in the current quarter. But he said growth will slow to below 3 percent in the second half of the year "under the weight of fading stimulus, slower global growth and a stronger dollar."

Even before the debt problems hit Europe, economists were forecasting that America's trade deficit would widen this year as a rebounding U.S. economy boosts demand for foreign goods from the lows hit last year when the country was struggling to emerge from the worst recession in decades.

Through April, the trade deficit is running at an annualized rate of $466.6 billion, up 25 percent from last year's deficit of $374.9 billion. That was the smallest trade deficit since 2001, another year when the United States was in a recession.

For April, the deficit with China jumped 14.3 percent to $19.3 billion, the highest level since November. The big increase reflected a 9.4 percent drop in U.S. exports to China, owing to big declines in sales of soybeans, motor vehicles and parts and raw cotton. Imports of Chinese products to the United States rose 6.6 percent led by higher sales of computers, household appliances and cell phones.

As usual, the U.S. deficit with China was the largest for any single country, a distinction that has attracted attention in Congress, where critics of China contend that Beijing is engaging in unfair trade practices that are costing U.S. manufacturing jobs.

Earlier Thursday, China reported its overall exports surged 48.5 percent in May while its imports rose 48.3 percent, producing a monthly trade surplus of $19.5 billion. Its exports to the United States rose 24.8 percent, and its May trade surplus with the United States was $16.7 billion.

Some lawmakers are pushing legislation that would impose stiff trade sanctions on China unless it allows its currency, the yuan, to start rising in value against the dollar. However, Treasury Secretary Timothy Geithner and Secretary of State Hillary Rodham Clinton made no headway on the currency issue during high-level talks in Beijing late last month.

The deficit with the European Union dropped 18.9 percent to $5.7 billion as U.S. exports fell by 9.4 percent while U.S. imports from the EU were down 11.8 percent.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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