Trade Deficit Widened in April;
Retail Sales Rose 1.2% in May

MARY KISSEL / Wall Street Journal 14jun04

WASHINGTON -- A wider-than-expected trade deficit and brisk retail sales signaled that the U.S. economy remains on a strong upward trajectory, but also prompted concerns in the markets that inflation is heating up.

The U.S. trade deficit widened to a record $48.33 billion in April, up from a revised $46.57 billion in March, according to the Commerce Department. The gap reflected a decline in exports of $1.5 billion, while U.S. imports remained largely flat. Although the decline in exports was widespread, a number of analysts dismissed it as an statistical aberration.

"Over the last year, exports were up 10%; over the last three months, exports rose almost 20% at an annual rate" said John Ryding, chief U.S. economist for the investment bank of Bear Sterns. "The trend is unambiguously higher." The National Association of Manufacturers also dismissed the decline as "a one-time correction."

Although the widening trade deficit can put downward pressure on the dollar, and ultimately boost inflation, it can also be a signal of economic strength. That's because the U.S. is growing more rapidly than other industrialized nations, and is sucking in more imports than its trading partners.

Retail sales, which grew at a 1.2% pace in May, compared to a 0.5% drop in April, provided another signal of a strengthening U.S. economy. May retail sales were boosted by a healthier job market and aggressive discounting at car dealerships nationwide, which were offering deals as a way to counter the effects of higher gasoline prices. Light-vehicle sales rose 14.6% in May, among the big three car manufacturers, compared to the month before, the National Automobile Dealers Association said. "People follow these incentives closely," said Paul Taylor, the NADA's chief economist.

On June 29 and 30, the Federal Open Market Committee is meeting to determine the direction of interest rates. The Fed is widely expected to start to boost its key rate from a 46-year low of 1%, and has said it will move at a "measured" pace. If inflation is seen as growing threat, the Fed could move rates up by half a point, rather than a quarter percentage point.

The persistence of the trade deficit has been something of a mystery, given the depreciation of the dollar over the past two years. The weaker U.S. dollar should make imports more expensive -- and thus discourage Americans from purchasing as many of them. The U.S. dollar has fallen 9.5% in trade-weighted terms -- a wide measure of its value versus world currencies -- from its peak in February 2002, according to J.P. Morgan.

But according to Mark Zandi, chief economist at economic consulting firm of Economy.com, the dollar would have to fall an additional 15% to 20% in order to impact U.S. exports significantly. Price changes may take a year or more to work through the economy, say economists.

Nevertheless, the widening trade gap is likely to give political ammunition to Democratic presidential candidate John Kerry, who has criticized the Bush administration for failing to enforce trade agreements aggressively. The Bush administration rejects that argument and, after a period where it favored import restrictions on steel and subsidies for U.S. agriculture, has touted trade liberalization as a driver of economic expansion.

The trade balance with China -- a target of Republicans and Democrats alike -- widened to $12 billion in April from $10.4 billion the month before.

"The record trade deficit -- and particularly the record trade deficit with China -- is more evidence that Bush's economic policy is not working," said Allison Dobson, a Kerry campaign spokeswoman.

Commerce Secretary Don Evans focused instead on the increase in retail sales, which he credited in part to the Bush tax cuts. "The economy is growing and consumers are spending more with their pocketbooks."