July 13 (Bloomberg) -- The U.S. trade deficit narrowed in May for the first time in six months as exports surged to a record, led by aircraft, engines and other capital goods, a government report showed. Imports also were the highest ever.

The $46 billion gap in goods and services trade followed a record shortfall of $48.1 billion in April, the Commerce Department said in Washington. The 4.5 percent reduction in the deficit in May was the largest since October 2002.

Exports rose 2.9 percent as the dollar dropped against the euro and yen, making U.S. goods less expensive to sell abroad. U.S. companies such as aircraft maker Boeing Co. and Parker Hannifin Co. are increasing overseas sales, aided by Japan's recovery and China's demand for raw materials and other products.

"Exports are finally rebounding as the world economy improves,'' said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

The trade deficit with Japan narrowed to $5.5 billion from $6.4 billion. The Japanese government became more optimistic about the outlook for the economy for the first time in six months, the Cabinet Office in Tokyo said earlier today.

The trade gap with China widened to $12.1 billion from $12 billion, with exports to China widening to $2.9 billion from $2.7 billion. Boeing, the world's second-biggest commercial aircraft maker, expects the Asian nation to be an important customer for its 7E7 aircraft scheduled for delivery in 2008.

"Asia is very strong because that's where the traffic growth is,'' Boeing Chief Executive Officer Harry Stonecipher, 68, said in an interview.

Trade Deficit

Economists had expected the deficit to remain at the $48.3 billion previously reported for April, according to the median estimate of 65 forecasts in a Bloomberg News survey.

The U.S. Treasury's 4 3/4 percent note maturing in May 2014 fell 5/16 point, pushing up the yield 4 basis points to 4.49 percent at 10:34 a.m. New York time.

The overall trade deficit so far this year is still larger than it was in the first five months of 2003. Through May, the deficit was $231 billion, compared with $208.7 billion a year earlier. For all of last year, the deficit reached a record $496.5 billion.

The trade deficit subtracts from estimates of gross domestic product because the goods and services come from elsewhere. At the same time, increased spending and inventory building, even with imported goods, contribute to GDP.

Growth Forecasts

Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, said the narrowing deficit may add 0.2 percentage point to forecasts for GDP in the April- June quarter. The economy is forecast to grow 4.1 percent at an annual rate in the second quarter, according to a Bloomberg survey of economists June 25-July 6.

Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said growth will be closer to 4 percent than 3.5 percent. Economists Steven Wood of Insight Economics and Joshua Shapiro at MFR Inc. said the April-May average deficit shows trade will subtract from growth in the April-June quarter.

In the first quarter, the deficit subtracted 0.7 percent from the final reading of gross domestic product, about twice as much as first estimated. The wider trade gap was one reason the revised estimate for GDP dropped to 3.9 percent from an original 4.4 percent.

Exports, Imports

Exports rose 2.9 percent to $97.1 billion in May, the biggest gain since a 3.1 percent gain in March. Foreign businesses bought $28.8 billion worth of capital goods from the U.S., a 6.3 percent increase.

Imports rose 0.4 percent for the month to $143.1 billion, led by automobiles and industrial supplies, including oil.

The value of U.S. oil imports rose in May to $10.5 billion from $9.7 billion the previous month. The price of oil was $33.12 a barrel, up from $31. The May deficit with OPEC was a record 5.6 billion.

Non-petroleum imports were a record $106.3 billion.

"Strong U.S. growth is being reinforced by generally strong economies around the world,'' Larry Kantor, head of economics and market strategy at Barclays Capital Inc. in New York, said. U.S. gross domestic product is forecast to grow 4.5 percent this year, the fastest since 1999, according to the most recent survey of economists by Bloomberg News.

Chicago-based Boeing delivered 14 of airplanes to foreign buyers in May, the most since November, compared with eight in April, according to figures posted on its Web site. The company has won orders worth $1.2 billion for 10 7E7 airliners split between Britain's First Choice Holidays Plc and Italy's Blue Panorama, the first European customers for the aircraft, the Chicago-based company said last week.

Exporters

"You can see the broad base of interest we have, it's clearly global,'' Michael Bair, a senior vice president at Boeing, said during a conference call with investors last week.

Cleveland-based Parker Hannifin, the world's largest maker of hydraulic equipment, said last week a 21 percent increase in orders from buyers outside North America contributed to a 24 percent advance in total bookings for the month of June compared with the same month last year.

Imports of autos and parts rose 2.4 percent in May to $19.4 billion.

At the same time, U.S. imports of consumer goods fell 3 percent. U.S. imports of capital goods rose 0.2 percent. Imports of industrial supplies, which include chemicals and metals as well as oil, rose 3 percent to $31.8 billion.

A drop in the value of the dollar may be contributing to the gains in exports. A cheaper dollar makes U.S.-made goods less expensive to foreign buyers.

The dollar has fallen more than 6 percent in the last two years against a trade-weighted basket of currencies from the nation's biggest trading partners, according to Federal Reserve figures. It has lost almost 10 percent of its value against the euro and 9 percent against the yen in the last year.

Regions

The trade deficit was aided by a pickup in economic growth in Japan and other parts of the world.

Japan's economy, the U.S.'s third biggest trading partner after Canada and Mexico, is expected to grow 3.2 percent this year, according to the median estimate of economists surveyed last month by Blue Chip Economic Indicators. The median forecast at the start of the year called for growth of just 2 percent.

Imports from China rose to $15 billion from $14.7 billion in April. The record was $16.5 billion in October.

Elsewhere, the trade deficit with Asia's newly industrialized countries narrowed to $1.3 billion from $1.8 billion. Exports to Singapore, part of that group, rose to $1.9 billion, the second highest on record.

The deficit with Canada, the largest U.S. trading partner, narrowed to $4.8 billion from $5.6 billion. The gap with Mexico widened to $3.8 billion from $3.2 billion.

The deficit with Western Europe narrowed to $8.2 billion from $10.1 billion.

Mortgage Rates News, Mortgage News, Financial News