Comment on Trade Deficit Numbers

The U.S. trade deficit rose to an unprecedented $61.0 billion in February 2005, the Department of Commerce reported today. This reflects an increase of $2.5 billion from January. While much of the increase was related to higher oil prices, there were also signs of continued weaknesses in other areas.

The widening deficit largely mirrored a greater petroleum product deficit, which grew by $1.2 billion from January, i.e. 48 percent of the rise in deficit resulted from oil-related products. Consequently, February's deficit totaled $16.4 billion, the second highest deficit in the past 14 months.

However, even if the oil-related deficit had remained unchanged from January, February's trade deficit would still have reached a record of $59.8 billion given that 52 percent of the deterioration in the trade deficit was not oil related.

For one, the widening of the trade deficit reflects slow growth in U.S. export markets. Underlying the widening of the trade deficit were larger deficits with Mexico, Japan, and the European Union, despite the fact that a weaker dollar over the past few years should have led to lower deficits. The U.S. trade deficit with Mexico alone rose by $0.8 billion from January to February.

At the same time, import growth surged again. Imports of industrial supplies and materials alone rose by $2.3 billion from January to February 2005, which was offset merely by a rise in exports of industrial supplies and materials of $0.5 billion. Also, the surplus in service trade shrank again by $0.3 million. The result was the smallest monthly surplus in services since August 2004.

Given that the rise in the U.S. trade deficit was driven by structural weaknesses as much as higher oil prices, foreign investors, who have helped finance the U.S. appetite for overseas products and kept interest rates low in the process, may look elsewhere to invest their money. This upcoming Friday, the Treasury will release its latest figures on international capital flows, which may show a growing reluctance to lend money to the U.S., especially to the federal government, which has financed a disproportionate share of its deficit by foreign borrowing. Should foreign investors lend less to the U.S., higher interest rates and slower growth could soon follow.

Christian E. Weller is a senior economist at the Center for American Progress.