U.S. Trade Deficit Drops, Unexpectedly

Economists generally expected the U.S. international trade deficit for goods and services to increase at least few hundred million dollars in March from February's record level. Instead, as surprising as an unanticipated rebate, the March deficit fell to $54.986 billion from February's revised figure of $60.570 billion, the U.S. Commerce Department reported on May 11.

In March U.S. exports reached an all-time monthly high of $102.205 billion and imports slowed to $157.191 billion from $161.250 billion in February.

"The sources of surprise in March were on both the export and import sides of the trade ledger, notes Sheryl King, a senior economist at Merrill Lynch & Co., New York. "Exports rose 1.5%, with a 26.9% surge in civilian aircraft exports leading the way. Telecom and food and beverages exports also saw notable increases of 8.5% and 6.6%, respectively," she relates. "On the import side, activity declined by 2.5%, driven by sharp drops in pharmaceuticals and apparel."

Peter Morici, a professor at the University of Maryland's Smith School of Business, points out that real petroleum imports declined in March. "Prices are starting to bite on imports, mostly in refined products," he says. Meanwhile, rising energy and health care costs may be reducing the amount U.S. consumers have to spend, which means lower retail sales and less demand for imports, he suggests. And third, the U.S. trade deficit with China is shrinking slightly. "Either Wal-Mart and others are diversifying to other points in Asia, or Chinese officials are starting to take administrative action of some kind to avoid a real revaluation" of the yuan, the Chinese currency, Morici says.

The U.S. trade deficit with China was $12.904 billion in March, lower than February's $13.871 billion, but still the largest deficit with any single country. For the first three months of 2005, the U.S. had a $42.030 billion trade deficit with China, a figure that if repeated the rest of the year would being the U.S. trade deficit with China to nearly $170 billion for all of 2005.

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