U.S. trade deficit narrows slightly

/ Source: The Associated Press

Soaring costs for gasoline and other energy products fueled inflation at the wholesale level in August for a second consecutive month even before the impact of Hurricane Katrina was felt.

Meanwhile, the Commerce Department reported that the U.S. trade deficit in July improved slightly despite the fact that oil imports climbed to an all-time high and the imbalance with China also set a record.

The Labor Department reported that wholesale prices rose 0.6 percent last month following an even bigger 1 percent jump in July. Outside of energy and food, inflation pressures continued to be moderate with so-called core inflation showing no change in August, the best showing since a decline of 0.1 percent in June.

But economists worried that this benign inflation picture may change with a continued onslaught of higher energy costs, reflecting shutdowns in production in the Gulf of Mexico caused by Hurricane Katrina.

“Energy costs have yet to be passed through but that may be changing. Energy surcharges are being announced more frequently and that is not a good sign,” said Joel Naroff, chief economist at Naroff Economic Advisors, a private consulting firm.

The July trade gap fell by 2.6 percent to $57.9 billion from an imbalance of $59.5 billion in June, the second highest deficit on record.

Analysts believe the July improvement will be short-lived — given that oil prices continued to soar in August.

The inflation report showed that wholesale energy costs were up 3.7 percent in August following an even bigger 4.4 percent July rise. However, core inflation, excluding energy and food, was frozen in August, following a 0.4 percent July increase.

Helping to keep inflation moderate, food costs at the wholesale level dropped for a fifth month in a row while prices of new passenger cars decreased by 1.3 percent, the biggest drop in 13 months.

So far this year, the country’s trade deficit is running at an annual rate of $693.1 billion, far ahead of last year’s record imbalance of $617.6 billion. Economists believe the deficit will worsen even more in 2006 as soaring oil prices continue to transfer more U.S. dollars into the hands of foreigners.

Critics blame the soaring deficit on Bush administration trade policies, contending that the administration has not been tough enough in attacking unfair trade practices in China and other countries and has pursued an agenda of striking free trade deals with other nations that expose American workers to increased competition from low wage countries.

The deficit with China increased by 0.3 percent to an all-time high of $17.7 billion and is running at an annual rate 29 percent above the same period last year, when the deficit hit $162 billion. That was the largest imbalance ever recorded with any country.

The improvement in the overall July deficit reflected a 1 percent increase in U.S. exports of goods and services, which rose to an all-time high of $106.2 billion as U.S. sales of computer chips, civilian aircraft and American-made cars all increased.

Total imports fell by 0.7 percent to $164.2 billion as declines in demand for foreign aircraft, computers and industrial machinery offset the big jump in oil imports.

Imports of oil jumped by 21.3 percent to a record of $20.7 billion in July. The increase reflected an increase in volume and price with the average price per barrel of crude oil imported in July hitting a record $49.03.

With oil prices soaring above $68 per barrel briefly in August, analysts believe that America’s foreign oil bill will surpass the July record, adding further pressure on the overall deficit.

The huge deficits have become a political headache for the administration, which in recent months has toughened its approach to China in an effort to ward-off protectionist trade legislation which is gaining momentum in Congress.

The administration has re-imposed quotas on various categories of clothing and textile imports from China and is negotiating with the Chinese for comprehensive limits on a broad array of Chinese imports to protect U.S. manufacturers who have been battered by a flood of Chinese imports since global quotas were lifted on Jan. 1.

However, congressional critics contend this is not enough. They want to impose across-the-board tariffs of 27.5 percent on Chinese goods coming into the United States to penalize the country for a currency regime that American manufacturers contend undervalues the Chinese yuan by as much as 40 percent, making Chinese products cheaper in relation to American goods.

China did announce a small revaluation of the yuan of 2.1 percent this summer but has not allowed the yuan to rise further in value.

America’s deficit with the 25-nation European Union hit a record of $11.2 billion in July with the deficit with Canada rose to $6.2 billion.