US trade deficit balloons to record $24.6bn

THE US trade deficit ballooned to a record level in June as Americans spent liberally on foreign cars, computers and clothing. The steep rise in imports dwarfed a small rise in exports, which was only the second rise this year.

The trade deficit reached $24.6bn in June, a 16.3 per cent increase from the $21.2bn deficit in May.

Imports of goods and services rose by 3.9 per cent to $103bn, also a record, while exports increased by just 0.5 per cent to $78.3bn.

The figures showed the trade deficit for the first half of the year running at an annual rate of $236bn, a massive 44 per cent up on last year's figure of $164.3bn, which was itself a record.

The steep rise in the trade deficit had not been anticipated. The financial markets plunged on the figures, with stocks, bonds and the dollar all falling.

The dollar fell sharply against the yen, falling to below 111 yen, and against the euro. By midday the Dow Jones Industrial Average was down by 107 points, or 1 per cent, at 10,884, helping to drag London shares down by almost 1.5 per cent. The benchmark 30-year US Treasury bond fell 5/32, with the yield rising to 6.01 per cent from 5.99 per cent.

While the trade deficit is not a prime factor in decisions on setting interest rates, the latest figures add to an overall impression of deteriorating economic indicators.

The figure will do nothing to dissuade the US Federal Reserve from announcing a widely expected rise in interest rates when its Open Market Committee meets next week. Labour costs rose by more than expected last month, and retail prices also rose, although not by as much as had been feared.

While the figures produced jitters in the markets, US economists were rather more sanguine. They described the level of the deficit as just one element of a healthy economy.

A Congressional hearing on the deficit, which was coincidentally held yesterday, was told that a more worrying indicator was the record level of consumer debt and the low savings rate.

However Catherine Mann, of the Institute for International Economics in Washington, said the trade figures showed an "unsustainable level of spending".

Ms Mann forecast that consumer debt would rise further, saying that this could lead to a "very difficult situation" and "economic disruption" unless consumers could be persuaded to change their habits.