The deficit in the broadest measure of foreign trade narrowed sharply in the first three months of this year after setting an all-time high at the end of 2005.
America’s current account trade deficit fell to $208.7 billion in the January-March quarter, down 6.5 percent from a record $223.1 billion deficit set in the final three months of last year, the Commerce Department reported Friday.
The improvement exceeded expectations although it still left the quarterly deficit at the second highest level on record and the equivalent of 6.4 percent of the total U.S. economy, down from 7 percent in the fourth quarter.
Analysts said rising oil prices will likely send the deficit in the current quarter to a new high, and they forecast that the imbalance for all of 2006 is on track to set a record for a fifth straight year.
“Even with the modest improvement at the start of the year, reducing the U.S. current account deficit will be an exceptionally slow process,” said Douglas Porter, an economist at BMO Nesbitt Burns, a Toronto investment bank.
The country has to raise $2 billion from foreigners each day to finance the deficits, which Democrats said means more and more U.S. assets being owned by foreigners and controversies such as the flap over the aborted Dubai Ports deal.
“The current account deficit remains unsustainably large,” said Sen. Jack Reed, the top Democrat on Congress’ Joint Economic Committee. “If we don’t change course, we will continue to mortgage our future to foreign investors and foreign governments.”
In a second report Friday, consumer sentiment in early June rebounded to 82.4 after a big drop in May, according to the University of Michigan’s preliminary survey for the month. Economists were encouraged that consumers’ expectations for future inflation dropped sharply, a development likely to be viewed favorably by the Federal Reserve.
The deficit in the current account is considered the best measure of America’s international standing because it covers not only trade in goods and services but also investment flows and foreign aid.
So far financing the deficit has not been a problem with foreigners more than willing to sell their cars, televisions and computers to Americans and hold dollars in return. That money is invested in stocks, Treasury bonds and other U.S. assets.
However, the concern is that at some point foreigners will become less willing to hold U.S. assets. If they began dumping their U.S. holdings it could depress stock prices, send U.S. interest rates higher and cause the dollar’s value to fall sharply.
The current account deficit in 2005 jumped 19 percent to $791.5 billion, according to revised figures released Friday, up from $665.3 billion in 2004.
For the January-March period, the deficit in goods and services narrowed by $4 billion to $190.7 billion. Americans earned $1.9 billion more on their overseas investments than foreigners earned on their U.S. holdings, returning this figure to positive territory after it had slipped to a negative $2.2 billion in the fourth quarter.
The category that includes foreign aid and private remittances by people living in this country to their families overseas narrowed to $19.9 billion, $6.3 billion below the outflow in the fourth quarter.