U.S. Trade Deficit Shows Surprising Improvement

Drops by more than 6% in first quarter, but $208.7 billion deficit is still second-highest on record.

WASHINGTON (AP) - The deficit in the broadest measure of foreign trade showed an unexpectedly large improvement during the first three months of this year, but soaring global oil prices are expected to limit such gains.

The Commerce Department reported Friday that America's current account trade deficit fell to $208.7 billion in the January-March quarter, down 6.5 percent from the all-time high deficit of $223.1 billion set in the final three months of last year.

The improvement far exceeded expectations which had the first quarter imbalance dropping by just $1 billion from the fourth quarter record high.

The biggest change came in a drop in the amount of money that America sends overseas in the form of foreign aid and payments that families provide to relatives in foreign countries. American investment earnings also shifted back into positive territory and the deficit on goods declined a bit.

The deficit in the current account is considered the best measure of America's international standing because it covers not only trade in goods and services but also investment flows and foreign aid.

The deficit must be financed by the willingness of foreigners to hold an increasing amount of U.S. assets. So far, that has not been a problem because foreigners have been more than willing to sell their cars, televisions and computers to Americans and hold dollars in return. That money is invested in stocks, Treasury bonds and other U.S. assets.

However, the concern is that the current account deficit could grow so high that foreigners will become less willing to hold U.S. assets. If they began dumping their U.S. holdings it could depress stock prices, send U.S. interest rates higher and cause the dollar's value to fall sharply.

Even with the improvement, the deficit in the first three months of this year was the second highest on record, putting the country on track to set another record for the entire year.

The current account deficit in 2005 jumped 19 percent to $791.5 billion, up from $665.3 billion in 2004.

For the first quarter, the deficit in goods and services narrowed by $4 billion to $190.7 billion.

Americans earned $1.9 billion more on their overseas investments than foreigners earned on their U.S. holdings, returning this figure to positive territory after it had slipped to a negative $2.2 billion in the fourth quarter. Economists warn that with the growing holdings of foreigners in this country, the investment category will soon slip into negative territory on a permanent basis.

The category that includes foreign aid and private remittances by people living in this country to their families overseas narrowed to $19.9 billion, $6.3 billion below the outflow in the fourth quarter.

Critics of the Bush administration contend that the soaring deficits show that the administration has left Americans exposed to unfair foreign competition, contributing to the loss of nearly 3 million manufacturing jobs since Bush took office.

The administration points to the relatively low civilian unemployment rate and strong job growth to argue that in spite of the trade deficits, the U.S. economy is performing well.

More in Supply Chain