Originally created 12/19/97

Despite widened gap with Japan, overall October trade deficit improves

WASHINGTON -- Even as the trade gap with Japan worsened, America's overall deficit narrowed sharply in October to $9.7 billion. But serious troubles were seen ahead as the U.S. economy is buffeted by the Asian financial crisis.

The Commerce Department said Thursday the deficit declined by 13.7 percent from a September imbalance of $11.3 billion, one of the biggest in history.

U.S. export of goods and services rose 2.4 percent in October to an all-time high of $80 billion,with sales of American-made cars, farm products and industrial equipment posting big gains.

As exports increased, however, imports also set a record, edging up 0.4 percent in October to $89.7 billion, paced by a rising foreign oil bill.

The Clinton administration pointed to the export strength to show that American companies remain competitive, but private economists worried that financial problems in important Asian countries spell trouble ahead.

On Wall Street, the Dow industrials plunged 110 points Thursday as lingering Asian economic woes and concern over the Korean election contributed to lower expectations for corporate profits.

Analysts blamed disappointing earnings forecasts and ominous signs of trouble in foreign markets for the descent, which continued the previous session's decline.

The Dow Jones industrial average fell 100.91 points to 7,846.50.

South Korea, Indonesia and Thailand have been forced to seek multibillion-dollar bailouts from the International Monetary Fund as one after another Asian nation has been hit by collapsing currencies, falling stock markets and rising unemployment.

The currency declines will make Asian products cheaper for American consumers but will make American-made goods more expensive, a recipe for pushing up U.S. trade deficits.

"We have had such extreme depreciations of Asian currencies that their goods are going to be available here at fire-sale prices," Cynthia Latta, economist at DRI-McGraw Hill Inc., said.

So far this year, the trade deficit is running at an annual rate of $114 billion, even worse than last year's eight-year high of $111 billion. Many analysts believe the troubles in Asia could easily push the deficit for 1998 past $150 billion. That would likely fuel protectionist sentiment in Congress.

The rising deficit is expected to shave a half-percentage point from economic growth next year because of rising imports and weaker U.S. sales abroad.

While the October deficit was smaller than expected, financial markets reacted negatively to the widening of the trade gap with Japan. The Dow Jones industrial average closed down more than 110 points.

Jerry Jasinowski, head of the National Association of Manufacturers, said a survey of member companies showed that American electronics, telecommunications equipment and capital equipment firms expect to suffer the most from the "Asian flu" through a loss of key export markets.

He said manufacturers are not worried that the impact would be enough to derail the nearly 7-year-old economic expansion and might even act to prolong the recovery by keeping the Federal Reserve from raising interest rates next year.

Indeed, a separate report of the minutes of the Fed's mid-November meeting showed the central bank was leaning toward raising interest rates last month but held off in part because of the Asian financial crisis. Fed policy makers at their Tuesday meeting voted again to leave rates unchanged.

The administration also insisted Thursday that it foresees no serious threat to the U.S. expansion from the troubles in Asia.

Lee Price, acting undersecretary of commerce, said the administration hopes a Japanese package of tax cuts and support for Japan's banking system will help narrow a U.S.-Japan trade gap by stimulating Japanese demand.

Asked how confident he is that Japan finally is committed to doing what is necessary to restore growth after seven years of near-recession, Price said, "Many people in Japan are hopeful, and I am hopeful they are right."

For October, the deficit with Japan was up a sharp 14.3 percent to $5.87 billion, the worst showing since April 1995. The figure reflects a big surge in imports of Japanese cars.

The deficit with China, which set a record in September, narrowed a slight 5.9 percent in October to $5.2 billion as American exports climbed to a record $1.4 billion with increased sales of soybeans and commercial aircraft.

The deficit with the four Asian tiger economies -- South Korea, Hong Kong, Singapore and Taiwan -- narrowed to $1.4 billion in October from a record $2 billion in September. Economists said the improvement would be short-lived as the full impact of the currency turmoil begins to be felt.


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