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U.S. current account deficit hits record

America’s deficit in the broadest measure of international trade surged to an all-time high of $804.9 billion last year as the country went deeper into debt to foreigners.
/ Source: The Associated Press

America went deeper into debt to foreigners last year as the deficit in the broadest measure of foreign trade hit a record $804.9 billion.

The Commerce Department reported Tuesday that the deficit in the current account was up 20.4 percent from the previous record of $668.1 billion set in 2004 and analysts said it was likely to climb higher this year as well.

“We are hemorrhaging red ink and we are likely to continue doing that long into the future,” said Mark Zandi, chief economist at Moody’s

The 2005 current account trade deficit was a record not only in dollar terms but also as a percentage of the total economy at 6.4 percent of total economic output, up from 5.7 percent in 2004.

The deficit for just the fourth quarter also was a record at $224.9 billion, up by 21.3 percent from the third quarter, reflecting a big rise in the country’s foreign oil bill.

The unprecedented flow of American assets into foreign hands has raised economic anxieties that the United States is opening itself up too much to the rest of the world. Those concerns were evident in the uproar over the purchase of operations at six major U.S. ports by a company owned by the government of the United Arab Emirates.

The political fallout from that sale became severe as politicians worried about the national security implications of having an Arab country running U.S. port operations. DP World eventually announced that it would sell off its holdings at the six U.S. ports to an American company.

On Wall Street, the Dow Jones industrial average shot up to the highest close in nearly five years as investors were encouraged by a drop in interest rates. The Dow rose 75.32 points to close at 11,151.34.

The current account covers not only trade in merchandise and services but also investment flows. The deficit represents the total amount of borrowing that the United States must do every year from foreigners.

So far, foreigners have been happy to sell Americans their cars, television sets and oil and take U.S. dollars in payments. But economists worry that the trade deficit has grown so large that foreigners may balk at holding so much of their investments in U.S. stocks, bonds and other assets.

If they began dumping their U.S. assets, that could send the value of U.S. stocks and bonds plunging, pushing up American interest rates and weakening the value of the dollar. If the disruptions were severe enough, it could push the country into a recession.

Former Federal Reserve Chairman Alan Greenspan said last year that market forces probably would prompt an adjustment to a smaller deficit without serious disruption to the U.S. economy.

For 2005, the $804.9 billion deficit reflected a huge jump in the deficit in goods to $781.6 billion and an increase in the deficit for unilateral transfers, the category that includes foreign aid, to $82.9 billion.

Offsetting those deficits was a $58 billion surplus in services trade, a category that includes earnings by American banks, and a $1.6 billion surplus in investment earnings, which was down from an investment surplus of $30.4 billion in 2004.

Economists predicted the investment surplus would turn into a negative this year, reflecting the fact that foreigners now own much more of U.S. assets than Americans own of foreign assets.

Zandi forecast that the current account deficit for 2006 could rise to around $825 billion, another record but a slower rate of growth than recent years.

“A lot of things have to come together to make my forecast of a slowing current account deficit come true,” Zandi said, listing a retreat in oil prices, stronger U.S. export growth and a decline in the value of the dollar against the Chinese yuan.

In other economic news, the Commerce Department said that retail sales for February fell by 1.3 percent, the biggest setback in six months. There were big declines in sales of autos, clothing and furniture as cold weather during the month kept shoppers away from the stores.

That was a reversal from January when warm weather sent retail sales jumping by 2.9 percent, the biggest monthly increase in more than four years.

While the February decline was bigger than expected, analysts said they believed strong employment growth would keep consumer spending, which accounts for two-thirds of the total economy, moving forward in coming months.

“The February drop in retail sales is not a sign that the economy is losing momentum. It is simply a payback for extraordinary numbers in January,” said Richard Yamarone, chief economist at Argus Research, a New York consulting firm.