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. Last Updated: 07/27/2016

Trade Deficit Hits $24.6Bln as U.S. Splurges




WASHINGTON -- Imports surged in June, driving the U.S. trade deficit to another record, as Americans, feeling flush in the strong economy, continued to splurge.


The deficit swelled to $24.6 billion, the Commerce Department reported Thursday, an increase of 16.3 percent from the revised figure for May. The sharp growth - fueled by rising imports from Japan, China, Western Europe and Mexico - surprised many economists who had predicted that the gap would begin to narrow because the economies of Asia and Europe were growing stronger and recovering from the economic turmoil of last year.


Imports rose almost 4 percent, to $103 billion in June, topping $100 billion for the first time. U.S. exports, meanwhile, rose by less than 1 percent.


The trade report is the last significant economic report before Federal Reserve policy-makers meet Tuesday to debate whether short-term interest rates should be raised to slow the economy and prevent inflation from accelerating. While a widening trade gap can be a drag on economic growth, the surge in imports shows that consumers are continuing their spending spree while saving little, a significant concern of the Fed.


Many investors and Wall Street analysts expect the Fed to nudge up its benchmark interest rate by a quarter of a point, to 5.25 percent.


Cheaper imports have helped to keep prices low and inflation in check, so far. But the dollar has been weaker of late, and many economists contend that the spending spree on imports may help to drive up consumer prices. Sustained record deficits could cause the dollar's value to tumble further, making U.S. stock and bond markets less attractive to foreign investors.


Indeed, the dollar extended a slide Thursday after the release of the trade data. The dollar is now at a seven-month low against the yen. Treasury prices and stocks also fell Thursday.


"We now have as big of a deficit in one month as we once had in an entire year,'' said Clyde Prestowitz, the president of the Economic Strategy Institute, a research group in Washington.


The dollar often falls with a widening trade deficit because investors choose other markets when they see the deficit as a portent of possible problems.


The widening trade gap is also an economic measure that Republicans may seize upon in this campaign season as evidence that all is not well with the U.S. economy. Sluggish exports are a sign that U.S. manufacturing is weak. And many U.S. laborers, such as steelworkers and Midwestern farmers, consider the widening gap as a bad omen for their personal futures.


At a hearing on Capitol Hill, Catherine Mann, a senior fellow at the Institute for International Economics in Washington, said that though the deficit had not yet created a crisis, it was clear, from a long-term perspective, that "the United States is living beyond its means.''


Mann told the members of the Trade Deficit Review Commission that the sustained rise in U.S. stock markets had caused investors to feel more confident about the future value of their wealth and, in turn, was prompting them to reduce the amount they save.


"Consumers are spending beyond their personal incomes,'' she said. "At some point in time, in my estimation roughly two years, the rest of the world will say, 'We're not so happy about lending to you anymore.'''


The bipartisan deficit-review commission was created last year to study the causes and effects of the trade gap. The commission plans to report on its findings after holding hearings around the country.


According to the statistics released Thursday, consumers snapped up more foreign automobiles, computer accessories and diamond gems.


The total trade deficit for the first six months of the year was $118 billion - 57 percent higher than the cumulative gap for the first half of last year.