The deficit in the broadest measure of overseas trade tracked by the U.S. government grew to record levels in the first quarter as increased demand for foreign goods by American consumers far outstripped an increase in goods being exported.
The deficit on goods and services increased to an all-time high of US$144.9 billion in the first quarter from $127 billion in the fourth quarter of 2003. Economists had expected an increase but predicted the number would remain below $140 billion.
Unlike the trade deficit, which measures only goods and services, the current balance takes into account foreign investment in the United States, which is essentially money the United States is borrowing from overseas to restore the balance of spending versus income.
With interest rates seen poised to rise in recent weeks, more foreign governments invested in U.S. bonds and other securities.
News of the higher deficit put immediate pressure on the U.S. dollar as investors in the greenback pulled back amid questions about how the American economy pays back the deficit over the long run. The dollar was down against both the Yen and the Euro in Friday trading.
Although the current account measure looks at a range of factors, hard goods still accounted for most of the shortfall. The deficit on goods increased to $150.8 billion in the first quarter from $139.4 billion in the fourth quarter. That came despite a healthy increase in the value of goods exported, which rose from $186.9 billion to $193.9 billion, largely on the strength of manufacturing materials and supplies.
Imported goods increased more, growing from $326.3 billion to $344.7 billion in the first quarter, with consumer goods as well as industrial supplies making up most of the growth.
The United States maintained a surplus in the services category, exporting $13.9 billion more in services than it imported. A surplus also existed in the investment area, but it decreased to $12.7 billion compared to $16.2 billion the quarter before. The deficit in unilateral transfers — made up primarily of foreign aid payment to emerging economies — rose to $20.6 billion.
Commerce Department spokesperson Doug Weinberg told the E- Commerce Times that the methods used to calculate the total current account deficit have been refined, which might help explain why some of the increases outstripped expectations.
But he said the numbers also rose as a result of the strengthening U.S. economy, which has boosted consumer demand for goods in several categories, including automobiles and electronics.
The deficits are nothing new. The new record surpassed one set just a year ago, in the first quarter of 2003. The deficit hit a yearly high of $530.7 billion last year.
Some economists worry about a scenario in which foreign investors suddenly start selling off U.S. investments, causing markets to tumble. But Federal Reserve Chairman Alan Greenspan said this week that foreign demand for acquiring U.S. debt remains strong.
“They are presumed to be safe and they’re presumed to have significantly higher rates of return adjusted for risk than most other areas of the world,” Greenspan said during hearings before the Senate Banking Committee.
Still, many economists believe the deficits do serve as a drag on the U.S. economy and already the position the U.S. should take on trade is poised to become a major issue in the ongoing Presidential election.
“The deficit is likely to continue to grow in this period of economic expansion in the U.S.,” economist David Ingram of Economy.com told the E- Commerce Times. “As much as the rest of the world’s economy is growing, demand in the U.S. for foreign goods will continue to expand faster.”