U.S. Trade Deficit Improves in Sign of Cooling Economy

The U.S. foreign trade deficit shrank to $8.3 billion in April, the Commerce Department reported Thursday, marking renewed improvement in the nation’s trade picture following several months in which the deficit had seemed stuck on a plateau.

The narrowing, from a revised $9.5-billion red-ink figure in March, reflected a slowdown in the domestic economy, which has dampened import buying by consumers. Imports fell $1.03 billion, or 2.6%, in April. Exports rose a respectable $249.2 million, or 0.8%.

Anticipation of improvement in April sent the dollar soaring on the foreign exchange markets, but the value of the U.S. currency declined once the figures were announced as traders sought to capitalize on the gain.

Although the dollar rallied in Tokyo, ending up a full 3.5 yen higher than the previous day, it finished mostly lower in European trading. Central banks of both the United States and other industrial countries continued to intervene in an effort to stem the dollar’s rise.

Both the Bush Administration and most private analysts hailed the new trade figures as encouraging--particularly after a six-month hiatus during which the overall deficit failed to show any improvement.

‘Very Encouraging’

U.S. Trade Representative Carla A. Hills said the April report provided “some further evidence of the gradual reduction of the deficit.” And Sara Johnson, economist with DRI/McGraw Hill, an economic forecasting firm in Cambridge, Mass., called the figures “very encouraging.”

Johnson predicted that the overall U.S. trade deficit would fall to $111 billion by the end of this year, down from $119.8 billion in 1988. The gap had grown to $152.1 billion in 1987 before finally beginning to shrink, partly as a result of a sharply lower dollar.

The improved outlook came as a relief to economists. Only a few months ago, analysts had feared that the domestic economy might be overheating--a development they warned could lead to a continuation of the nation’s import-buying spree and an end to the improvement in trade.

But that danger appears to have passed. Import buying has slowed, and U.S. demand has weakened somewhat, easing pressure on U.S. manufacturing industries, many of which had reached the limits of their production capacity earlier this year.

New figures published by the Federal Reserve Board on Thursday buttressed that view. They showed that industrial production in the United States remained unchanged in May, following a revised 0.6% rise the previous month, providing further evidence that the economy is slowing.

‘Old-Fashioned Way’

The Fed also reported that manufacturing industries in the United States used only 83.8% of their available production capacity in May, down from 84.1% in April. Both figures were influenced heavily by a slump in the U.S. auto industry.

William C. Melton, chief economist for IDS Financial Services in Minneapolis, said the trade figures showed that America is “reducing its trade deficit the old-fashioned way--by leaning on consumers” through higher interest rates and tight money and credit policies.

At the same time, Japan’s trade surplus with the United States has begun to shrink markedly, in part because Tokyo is buying more U.S. manufactured goods. Thursday’s figures showed that the U.S. trade deficit with Japan fell to $3.89 billion in April, from $4.22 billion in March.

DRI/McGraw Hill’s Johnson speculated that at least part of the improvement in April may have stemmed from perverse effects of the recent rise in the dollar, which has recovered about a third of the ground that it lost between 1985 and 1988.

Although a rising dollar makes imports less expensive--eventually spurring more import buying--in the short run the lower prices for imports make the deficit seem smaller. As a result, Johnson predicted, the trade figure now may continue to improve through early 1990.

About two-thirds of the April falloff in import buying came in automobiles, where weak domestic demand--combined with the transfer of more production of Japanese cars to assembly plants in the United States--slashed sales of imports here.

Oil imports, another major contributor to the monthly trade deficit, rose by $398.1 million in April to a new level of $4.1 billion, partly as a result of higher prices for petroleum products.