Will a Narrowing Trade Deficit Boost the U.S. Economy?

The U.S. trade deficit narrowed in September to the lowest level this year as exports rose to a record high and imports stagnated for the fourth consecutive month.

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The shortfall shrank by 4% to $43.1 billion in September, from a downwardly revised $44.9 billion in August, according to a Commerce Department report released today in Washington.

Exports climbed 1.4% to $180.4 billion, boosted by overseas shipments of industrial supplies, capital equipment, automobiles, and consumer goods. Imports rose just 0.3%, also led by automobiles and industrial supplies, as well as food.

The U.S. imported less crude oil in September even though prices declined, with the average price of a barrel of imported oil falling to $101.02, compared to $102.62 in August. U.S. companies imported about 280 barrels in September, the fewest in four months.

Before today’s report, Commerce Department figures last month showed a narrow deficit contributing 0.2% to the 2.5% increase in third-quarter economic growth. However, despite two months of improvement, economists aren’t predicting the trend will continue.

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“With the global environment so uncertain, there is going to be some downward pressure on export demand,” said Alex Hodern, an economist at FTN Financial in New York. Hodern does expect domestic demand to pick up, but says that it won’t reach “the pace we had before the recent recession.”

Slower job and salary growth may limit household spending on non-essential goods. According to a poll conducted last month by BIGresearch, shoppers plan to spend less this holiday season than last year.

Still, the drop in the value of the dollar since the middle of last year continues to support overseas demand for U.S. goods. The Dollar Index, used by IntercontinentalExchange Inc. to track the currency against six major trade partners, including the euro and yen, fell 18% between June 7, 2010 and April 29, 2011. However, as the crisis in Europe deepens, the dollar has been gaining ground against the euro.

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The U.S. trade deficit with Canada widened in September to $3.5 billion, while the gap with Mexico shrank to $5 billion. The deficit with the European Union narrowed to $6.4 billion. The U.S. had a $1.2 billion surplus with Brazil.