Trade gap widens, import prices surge

06/09/2006

Friday June 9, 11:59 AM EDT

By Doug Palmer

WASHINGTON (Reuters) - The U.S. trade deficit widened less than expected in April, but oil import prices surged again in May, government reports showed on Friday, increasing expectations the Federal Reserve will raise rates again to try to curb inflation.

The U.S. trade gap widened to $63.4 billion in April, lower than the $65 billion shortfall Wall Street analysts had expected. However, another government report put import prices up 1.6 percent in May, more than twice the increase expected.

Although the month-to-month change in the trade deficit was less than expected, the trade gap still grew 2.5 percent from a slightly revised estimate of $61.9 billion in March. In the first four months of this year, the trade gap totaled $254.2 billion, on pace to surpass the record of $716.7 billion set for all of last year.

Average prices for imported oil in April hit $56.82 per barrel, up nearly 9 percent from March and second only to the record of $57.42 set in September 2005, the Commerce Department said in its monthly report. A separate Labor Department report on imports said oil and oil product prices surged 5.2 percent May.

The price data added to inflation concerns that could prompt the Fed to again raise interest rates at its meeting on June 28-29. Fed Chairman Ben Bernanke is scheduled to speak about energy policy to the Economic Club of Chicago on Thursday.

“When you are in a period of inflation phobia, this is not good news. It’s not raging inflation, but it’s a little worse than expected,” said Keith Hembre, chief economist with FAF Advisors in Minneapolis.

The dollar spiked to a fresh one-month high against the euro on Friday after the trade and price data but later erased its gains.

“All in all, the data is dollar positive,” said Greg Anderson, senior currency strategist with ABN AMRO in Chicago. The portion of the trade deficit that excludes oil “showed a little deterioration, while the surprise was the oil deficit wasn’t worse” than it was, he said.

U.S. Treasury debt prices turned lower because May import prices suggested inflation may be rising above the Fed’s comfort level. U.S. stock market indexes were modestly higher on an improved outlook for technology companies.

April imports grew 0.7 percent from the previous month to $179.1 billion, the second highest on record. Oil and other petroleum products accounted for nearly $23.4 billion of the total, although import volumes fell as prices rose.

“This decline in the volume of petroleum product imports is a very welcome development, as it reflects stagnating domestic demand for petroleum products in response to the spike in prices,” said Brian Bethune, Global Insight’s U.S. economist.

“At the same time, domestic refineries have managed to crank operating rates up to 91 percent, the highest level in several months,” Bethune said. Both trends signal an improvement in U.S. petroleum supply and demand fundamentals, he said.

Imports of capital goods, such as computers and computer accessories, telecommunication equipment and industrial machines, hit a record while other categories such as automobiles and consumer goods were near records.

U.S. exports, reflecting stronger growth overseas and a decline in the value of dollar in recent years, totaled $115.7 billion in April, just shy of the record high set in March.

Exports to Canada and China, two major U.S. trading partners, were also second only to the records set in March.

Even so, the politically sensitive trade gap with China widened in April to $17 billion, prompting a renewed call from Democrats for the Bush administration to file a World Trade Organization against China for alleged currency manipulation.

“These figures are a jarring reminder that our nation needs a new approach to its trade policy,” said Rep. Ben Cardin, a Maryland Democrat.

U.S. exports of industrial supplies and materials, which includes plastics, chemicals and petroleum products, hit a record in April.

Exports of services - a broad category ranging from travel and tourism to banking and professionals such as lawyers and architects - also set a record.