NEWS AND COMMENTARY
September 20, 2000
July Trade Gap At Record $31.9 Billion: Record Crude Imports Continue To Impact Deficit
By Rachel Koning, CBS.MarketWatch.com
Trade Deficit Achilles Heel Of US Dollar And Economy ... Weiss comments
WASHINGTON - Record crude imports pushed the U.S. trade deficit into new territory during July, the Commerce Department reported on Wednesday.
The U.S. goods and services trade gap stretched to $31.9 billion that month, as record imports outdid the second highest level of exports ever. A survey of economists by CBS.MarketWatch.com looked for a deficit of $31.3 billion that month.
Strong dollar benefit
A month earlier, the then-record trade shortfall stood at an upwardly revised $29.8 billion.
Economists -- among them Federal Reserve Chairman Alan Greenspan -- have said that a strong dollar continues to minimize the economic impact of a burgeoning trade deficit. Favorable returns on dollar-denominated U.S. investments are still drawing overseas funds. Accordingly, many have said the robust dollar is financing the trade deficit.
In fact, the dollar earlier this week reached an all-time high against the euro, with one euro worth just over 84 cents. Following the release of the trade data, a euro was trading off 0.3% at 84.90 cents, while dollar/yen eased 0.5% at 106.46 yen.
"Indeed, merger and acquisition activity has funneled $300 billion into the U.S. over the past year; net foreign purchases of U.S. stocks has added $130 billion and foreign purchases of U.S. corporate and agency debt has added another $260 billion," remarked Tony Crescenzi, CEO of BondTalk.com. "Combined, these massive inflows are dwarfing the short-run importance of the trade data."
The risk, however, is that any turn southward in sentiment could spawn an exodus of foreign investment from U.S. shores.
In July, exports totaled $89.7 billion, with both goods and services exports at their second highest marks on record. Exports of semiconductors dipped during July, as did civilian aircraft and parts. Exports of telecommunications and computers rose that month.
Crescenzi said fewer exports support other data that show activity slowing at U.S. factories.
Imports, thanks to a record $8.4 billion spent on 300 million barrels of crude, reached $121.6 billion in July -- a fresh all-time high.
Importers paid $27.76 a barrel that month, the highest since $29.51 was paid in November 1990 on the cusp of the Gulf War.
A combination of a widening trade deficit and a very strong dollar make the U.S. economy doubly vulnerable. If it gets to a point where the trade deficit weakens the economy, the dollar will fall, and foreign investors will suddenly see a precipitous decline in their U.S. investments AND the value of their U.S. dollars. They will pull their capital out of the U.S. in droves, resulting in a glut of dollars -- which means higher inflation -- and plunging stock and bond markets as foreign money flees.
Any movement by the European Central Bank to intervene on behalf of the euro could very well cause an exodus of European investment from both U.S. stocks and bonds. Just last week we saw the ECB test the waters in preparation of just such an intervention. Don't expect the ECB to allow the euro to fall much lower before it steps in.