Widening trade gap seen as good and bad

WASHINGTON — The trade deficit rose in May to its highest level since the start of the recession, but economists disagreed on whether it was good news or bad news for the American economy.

The trade gap grew 4.8 percent to $42.3 billion, the largest deficit since November 2008, the Commerce Department said Tuesday.

Strong growth in exports was more than offset by a rising tide of imports, especially cars and consumer goods such as clothing, furniture and appliances.

Some economists said the widening trade deficit would reduce growth, as measured by gross domestic product, in the April-to-June quarter.

Through May, the U.S. trade deficit is running at an annual rate of $474.8 billion, up by 26.6 percent from $374.9 billion deficit for all of 2009. That had been the lowest annual trade gap since 2001, another year when the country was in recession.

The May deficit was a surprise to analysts, who had expected a slight decline because of the fall in oil imports. The larger trade gap caused some to trim forecasts for overall growth in the quarter, though many said they expected less of a drag in coming quarters.

Mike England, an economist at Action Economics, said he believed a widening trade deficit would trim nearly 2 percentage points off GDP in the second quarter. He put second-quarter growth at around 2.2 percent and projected a GDP growth rate of around 2.8 percent in the third quarter.

But many economists also saw the rise in imports as a sign of increased business optimism about the future. They said U.S. companies imported more goods in anticipation of higher consumer spending later in the year.

"The strong increases in both export and import volumes are far more important as a sign of continued growth at home and abroad than the widening trade gap," economists at forecasting firm RDQ Economics wrote in a research note. "It seems to us that the expansion of world trade has a robust momentum."

American manufacturing has been a standout performer during the recovery, benefiting from a global rebound. Those gains risk being diminished by the European debt crisis, which has slowed growth in Europe and raised the value of the dollar 14 percent this year versus the euro. A stronger dollar against the euro makes U.S. goods costlier and less competitive in Europe.

"This will certainly prove supportive to economic growth in the months to come," Martin Schwerdtfeger, an economist at TD Economics, wrote in a research note.

The deficit with the European Union rose 7.5 percent to $6.2 billion as imports rose 3.2 percent, outpacing a 1.9 percent rise in U.S. exports to that region.

The deficit with China rose to $22.3 billion, the largest imbalance since October. The deficit with China is up 10.2 percent from a year ago, putting pressure on the Obama administration and Congress to adopt a tougher stance.

Last week, the Obama administration declined to cite China in a report to Congress as a country that was unfairly manipulating its currency to gain trade advantages. That disappointed American manufacturers who say the Chinese yuan is undervalued by as much as 40 percent.

On June 19, just before leaders of the Group of 20 major industrial countries met in Toronto, China announced it would allow more flexibility in its currency. But critics note that the yuan has risen in value only slightly since then.

Some analysts warned that the widening trade deficit, and its impact on GDP, come at a bad time for the economy, which has been losing momentum.

"The widening trade gap is putting downward pressure on U.S. GDP when it is most vulnerable," said Stuart Hoffman, chief economist at PNC Financial.