Trade Gap Worsens as Import Surge Continues : Deficit Balloons to $10.24 Billion in May as U.S. Firms Buy More Foreign Goods; Exports Strong

WASHINGTON —  The nation’s stubborn trade deficit took an unexpected turn for the worse in May, ballooning to $10.24 billion, well above the 1989 low of $8.29 billion recorded in April, the Commerce Department said Tuesday.

Imports were the main reason for the deeper lurch into the red, as often has been the case in the past. U.S. business, still on an investment boom, continued to import nearly $20 billion in capital goods and industrial materials, which together counted for more than half of May’s $1.7-billion increase in imported goods over April. Oil imports, boosted by higher prices and a 14% increase in volume, also soared by $700 million.

At the same time, exports of American-made and American-grown goods remained at near-record highs.

Economists disagreed on whether the report points to an economy apparently facing a rapid slowdown. But there was consensus that the strong trade improvement of the last 18 months is now subsiding rapidly and that it likely will stall in the second half of 1989.

“These numbers for May are definitely bad news,” said Howard Lewis, international trade specialist at the National Assn. of Manufacturers. “We’re still on track for an improvement in the trade deficit this year, but it will be smaller than last year and there’s trouble ahead for 1990 and 1991,” he said in a statement.

Irwin L. Kellner, chief economist at Manufacturers Hanover in New York, agreed that the trade reversal in May probably was the start of a trend, after a period in which imports slowed and exports boomed.

“There will be zigs and zags, month to month, but the improvement is now definitely flattening and the deficits may start getting worse,” Kellner said.

He added another warning: “The key point is that this is one more sign that the economy is in serious trouble. Since the growth in exports is declining, that could remove one of the last remaining props under economic activity. And the fact that imports are growing while consumer spending is declining clearly denotes a lack of competitiveness in many industries.”

The sharp rise in the deficit was well above the financial markets’ expectations of a modest increase to about $9 billion. While export levels remained high, May’s total slipped $300 million below the $30.76 billion of products shipped overseas in April, the all-time high-water mark for merchandise exports.

Kellner noted that the U.S. trade balance with virtually every part of the world worsened in May. The biggest imbalance, with Japan, grew from $3.89 billion to $4.28 billion. The deficit with developing countries went from $3.63 billion to $4.99 billion, while a small $231-million surplus with Western Europe tipped back into a $78-million deficit.

But analyst Giulio Martini of Sanford C. Bernstein & Co. in New York was less pessimistic about the outlook for the economy. Noting that May’s export total was within 1% of the April record high, and that the $800-million increase in imported capital goods outweighed the $100-million surge in consumer imports, he projected continued economic growth ahead.

“The worry is on the import side,” he said. Because industry is still investing heavily in foreign-made equipment and machinery, “you see a consistent increase in imports.” Larger trade deficits may continue for the foreseeable future, he said.

To some economists, the continuing flood of capital goods into the United States is begining to send an ominous signal. “To invest in machinery, to modernize is a good thing,” said Lewis, “but a lot of this reflects the fact that we no longer make a lot of these products any more. It would be a hell of a lot better if more of these capital goods were coming from the domestic side.”

Lewis said he expects that continued slackening in the improvement in the trade deficit could trigger renewed pressure in Congress for punitive measures against nations that run a large trade surplus with the United States.

The trade deficit for 1989 should wind up $10 billion to $15 billion better than 1988’s $118.53 billion, he said, but in the monthly tallies ahead, “we don’t expect it to get better. We expect it to bottom out and get worse.”

”. . . When a lot of people in this town who expect the trade deficit will keep on improving realize that it is hitting a wall around $110 billion, then we’ll get a reignition of the debate on trade policy that could make 1987 look like a picnic,” he said, referring to the big push for the trade reform measure that finally became law last year.

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