Weak dollar no quick fix for narrowing trade gap

[November 14, 2009]  WASHINGTON (AP) -- A weaker dollar may boost the nation's economy by increasing exports and narrowing the trade gap - but that won't happen anytime soon.

Instead, the nation's trade deficit rose in September by the largest percentage in a decade as U.S. exports grew for the fifth straight month, but imports rose faster, a government report showed Friday. That trend is likely to continue until the middle of next year, economists said.

Rising oil prices and higher purchases of foreign goods by U.S. companies drove imports higher. So did more purchases of foreign parts by U.S. manufacturers, which are ramping up production in the fledgling economic recovery.

Higher exports, spurred by a lower dollar, probably won't reduce the trade gap and boost the U.S. economy until 2011, economists said.

"You tend to see imports surge when production begins to grow," said Julia Coronado, senior U.S. economist at BNP Paribas. That's overriding the benefit of the weaker dollar on exports, she said.

Imports in September rose 5.8 percent from August, led by a 20 percent jump in oil shipments. That's the biggest rise in imports in 16 years. Exports, meanwhile, increased about 3 percent, reflecting stronger sales of American autos, aircraft and industrial machinery.

Overall, the monthly trade deficit jumped 18.2 percent to $36.5 billion, the Commerce Department said, the largest monthly percentage increase since February 1999.

The weaker U.S. dollar will likely have a greater impact on U.S. exports by late next year, economists said. When the dollar declines compared with other currencies, it makes U.S. exports cheaper and imports more expensive, narrowing the trade deficit.

"Longer term, there's no question the weak dollar is a big plus for U.S. export growth," Nigel Gault, chief U.S. economist at IHS Global Insight, said.

But the dollar hasn't yet fallen that much, Gault noted. It is down about 12 percent against a basket of major currencies since last spring, but is at roughly the same level it was in the summer of 2008, he said. The financial crisis that fall drove many international investors to the safety of U.S. Treasury bonds, driving up the dollar's value.

The impact of a cheaper dollar can also take as long as a year to kick in, said Paul Dales, U.S. economist at Capital Economics. That's because foreign exporters to the U.S. don't immediately adjust their prices to take into account changes in exchange rates.

For now, the value of U.S. exports is still about 20 percent below where they before the financial crisis erupted last year. And Dales said exports and imports are likely to continue rising at roughly the same pace. If so, U.S. trade wouldn't likely contribute to U.S. economic growth during the early stages of the recovery.

Still, further rises in exports should provide some aid to U.S. manufacturers. Heavy equipment maker Caterpillar Inc. expects sales to rise next year, after being battered by the downturn, mostly due to greater demand in China and other Asian markets.

But those gains will be offset by a rebound in imports as U.S. consumer demand for foreign goods also picks up, analysts said.

Higher imports and exports are a sign of economic recovery in the U.S. and other countries, Gault said.

But imports in September were higher than expected, which means that less production took place in the U.S. in the July-September quarter than the government estimated last month.

In late October, the Commerce Department said the economy grew at a 3.5 percent rate in the third quarter. But now that September's trade figures have been reported, that figure will likely be revised lower later this month, economists said.

Oil rose sharply during October, from about $71 per barrel to $77, a factor that could help widen the trade deficit further once the government reports that figure next month.

The U.S. deficit with China, which had been falling, jumped 9.2 percent to $22.1 billion in September, the highest imbalance in 10 months. For the year, the U.S. trade deficit with China is down about 16 percent, though the gap is still the largest the U.S. has with any country.

China on Thursday appeared to signal that it would allow its currency, the yuan, to rise against the dollar. The Chinese central bank said Thursday it would alter how it manages the yuan, which is currently pegged to the dollar. That change raised hopes among economists that China was preparing to allow its currency to rise in value, a change that would boost the competitiveness of American products in China.

American manufacturers contend that China is manipulating the value of its currency, keeping it undervalued by as much as 40 percent in relation to the dollar. That gives Chinese manufacturers a competitive advantage and makes U.S. goods more expensive in China.

[Associated Press; By CHRISTOPHER S. RUGABER and MARTIN CRUTSINGER]

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