Fri Aug 13, 2004
By Tim Ahmann

WASHINGTON (Reuters) - The U.S. trade deficit widened much more than expected in June, hitting a record $55.8 billion on the biggest drop in exports in nearly three years and record imports, the government said on Friday.

Separate reports showed producer prices largely under wraps last month and consumer sentiment eroding in August.

Wall Street economists had expected the trade gap to grow, but looked for a deficit of just $47 billion. Instead it jumped 19 percent, the biggest increase in more than five years.

Analysts said the unexpectedly large gap will lead the government to lower its reading of second-quarter economic growth, which it had put at a 3 percent annual rate in a snapshot late last month. Before Friday, economists had been thinking the GDP figure would actually be bumped up.

"It's extraordinary, I've never seen this big a swing in one month," said Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York.

The dollar fell broadly after the data, while prices for U.S. bonds rose as traders read the economic tea leaves as suggesting a somewhat slower pace of interest-rate rises from the Federal Reserve than had been expected.

Stocks, which closed at year lows on Thursday, edged into positive territory in early trade, buoyed by corporate news.

"The weakness in exports and a decline in confidence raise yellow flags about the performance of the economy," said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. On the bright said, she said, rising imports suggested U.S. consumers and businesses were still shopping.

SOURING ON THE FUTURE

The Labor Department said the producer price index, which gauges prices received by farms, factories and refineries, rose 0.1 percent last month, after a 0.3 percent fall in June. Economists had expected a 0.2 percent gain.

The report showed a 2.3 percent jump in energy prices that was largely offset by a 1.6 percent plunge in food costs, the largest fall since April 2002.

Core producer prices, which strip out volatile food and energy costs, gained a slim 0.1 percent, as expected.

Economists said the price report suggested inflation at the wholesale level was under wraps, although some expressed concern that rising prices further back in the production pipeline could spell trouble down the road.

The biggest sore spot in the U.S. price picture has been oil. U.S. crude prices hit yet another record high on Friday at $45.90 a barrel.

The recent run-up in oil prices showed through in all three economic reports released on Friday, helping stoke June's record imports, putting upward pressure on producer prices and, in the view of economists, souring consumer moods.

The University of Michigan's consumer sentiment index for early August fell to 94.0 in from 96.7 at the end of July, according to sources who saw the subscription-only report.

Analysts, who had been expecting a slight increase, noted a divergence between optimism on current conditions and a less rosy view of the future.

"Not a surprise really given that equities are falling, oil prices are rising and employment is quite soft," Shaun Osborne, chief currency strategist at Scotia Capital in Toronto, said of the overall reading.

TRADE SHOCK

But it was the trade report that garnered the most attention on Wall Street.

Economists were taken aback by the decline in exports, which fell 4.3 percent in June. It was the largest drop since September 2001 and the weakest performance since February.

At the same time, imports climbed 3.3 percent to a all-time high, reflecting higher oil prices.

Crude oil prices hit $33.76 a barrel in June, according to the Commerce Department's measure, their highest level since March 1982. The quantity of crude imports also hit a record.

The politically sensitive trade gap with China widened to a record $14.2 billion as exports eased and imports soared to an all-time high.

For the first half of the year, the trade gap came in at $287.7 billion, putting it well ahead of the same period last year and on track to break last year's record $496.5 billion.

Mortgage Rates News, Mortgage News, Financial News