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Trade deficit narrows in May

By Bloomberg News
July 14, 2004

WASHINGTON -- The US trade deficit narrowed in May for the first time in six months as exports surged to a record, led by aircraft, engines, and other capital goods, a government report showed. Imports also were the highest ever.

The $46 billion gap in goods and services trade followed a record shortfall of $48.1 billion in April, the Commerce Department said in Washington. The 4.5 percent reduction in the deficit in May was the largest since October 2002.

Exports rose 2.9 percent as the dollar dropped against the euro and yen, making US goods less expensive to sell abroad. US companies such as aircraft maker Boeing Co. and Parker Hannifin Co. are increasing overseas sales, aided by Japan's recovery and China's demand for raw materials and other products.

''As the world economy is improving, our exports are on the rise again," said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. Exports had declined 1 percent in April.

May's trade deficit with Japan narrowed to $5.5 billion from $6.4 billion. The Japanese government became more optimistic about the outlook for the economy for the first time in six months, the Cabinet Office in Tokyo said earlier yesterday.

The trade gap with China widened to $12.1 billion from $12 billion, with exports to China widening to $2.9 billion from $2.7 billion.

Boeing, the world's second-biggest commercial aircraft maker, expects the Asian nation to be an important customer for its 7E7 aircraft scheduled for delivery in 2008.

''Asia is very strong because that's where the traffic growth is," Boeing chief executive Harry Stonecipher, 68, said in an interview.

Economists had expected the deficit to remain at the $48.3 billion previously reported for April, according to the median estimate of 65 forecasts in a Bloomberg News survey.

The dollar had its biggest gain against the euro in two weeks after the trade report. The dollar strengthened to $1.23 per euro from $1.24 late yesterday. The US Treasury's benchmark 10-year note fell 3/16 point, pushing up the yield 2 basis points to 4.47 percent.

The trade deficit narrowed even more when adjusted for higher prices. The inflation-adjusted gap was $50.2 billion in May, the smallest since November and down from $53.5 billion a month earlier.

The overall trade deficit so far this year is still larger than it was in the first five months of 2003.

Through May, the deficit was $231 billion, compared with $208.7 billion a year earlier. For all of last year, the deficit reached a record $496.5 billion.

The trade deficit subtracts from estimates of gross domestic product because the goods and services come from elsewhere. At the same time, increased spending and inventory building, even with imported goods, contribute to GDP. The trade gap was one reason that the final figure for first-quarter GDP dropped to 3.9 percent from an original estimate of 4.4 percent.

Before yesterday's release, economic statistics ''were suggesting GDP growth of 3 percent to 3.5 percent in the second quarter, but the trade results boost projected growth to a range of 3.5 percent to 4 percent," said Michael Moran, chief economist at Daiwa Securities America Inc. in New York.

Net exports may subtract a quarter percentage point from second-quarter growth after subtracting 0.7 percentage point in the prior three months.

The economy is forecast to grow 4.1 percent at an annual rate in the second quarter, according to a Bloomberg survey of economists.


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