October Trade Deficit Takes Unexpected Reversal

The U.S. trade deficit increased, to a record $68.9 billion, in October. Reuters reports the actual figure far exceeded expectations. The deficit widened to record levels with Canada, Mexico, the European Union, and OPEC countries. This November report also showed an easing of inflationary pressures stemming from high energy costs and may have shown a rise in the dollar.

The Commerce Department reported the deficit increased 4.4 percent over September figure, which grew 11.9 percent over the August figure, according to Reuters. A survey of 22 economists, by Dow Jones NewsWires and CNBC forecast, the October trade deficit at $63 billion.

“The trade deficit certainly came in worse than expected. It was largely influenced but I don’t that should detract from the overall deterioration of the external balance," Bob Lynch, currency analyst at HSBC, told Reuters. "The dollar was already on the defensive this week, and this data only reinforces the bias.”

Imports of goods and services rose to a record $176.4 billion, up 2.7 percent from September, while exports increased 1.7 percent, to $107.5 billion. The export figure was the second highest on record. Analysts report that this pace of imports suggests robust business investment and hurricane rebuilding efforts, according to Reuters.

“On the import side, the strength is from a rebuilding of inventories from companies and a general expansion of the U.S. Petroleum imports increased, adding to the import bills,” Lynn Reaser, chief economist at the Banc of America Capital Management in Boston, told Reuters.

U.S. import prices fell an unexpected 1.7 percent in October, as the cost of petroleum imports fell 8 percent. This is the largest drop since December 2004, according to Reuters. Non-petroleum import prices also fell for the first time since July to 0.2 percent. Agricultural export prices dropped for the third time in four months, indicating a continuing soft export demand for American agricultural goods.

Reuters reported economists expected import costs to fall just 0.5 percent and export prices to rise 0.2 percent.

The WTO is currently holding global trade negotiations in Hong Kong. The European Union (EU) is being accused of holding up these talks after already offering generous cuts to its agricultural trade barriers. More developed nations, such as the U.S. and the EU, implement tariffs to protect their agricultural markets.

The intention of the WTO talks is to craft an outline of a global free-trade treaty envisioned by year-end 2006. The impasse remains between poorer and richer nations has yet to be resolved, however. Poorer, less developed countries feel the agricultural trade barriers are blocking their exports and continued economic development. The EU is asking that these poorer nations open their industrial and services markets to foreign competition.

U.S. consumers can expect prices to remain stable, or decline, based on these figures, but indicators such as falling agricultural export prices may indicate a soft export demand for American agricultural goods. With falling export prices, business doing international trade, especially agriculturally-based businesses, may also see less revenue for their efforts.

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