Four-month low for trade deficit

WASHINGTON - The U.S. trade deficit declined to a four-month low, even though imports from China hit an all-time high. Demand for Chinese goods has remained strong despite recalls of unsafe products this year.

In other economic news yesterday, inflation at the wholesale level jumped 0.6 percent in July, driven by higher energy costs. However, outside of energy, wholesale inflation remained under control, with core prices rising just 0.1 percent.

The trade deficit dropped to $58.1 billion in June, a 1.7 percent decline from the May level, the Commerce Department reported.

It was a bigger improvement than had been expected and left the deficit at its lowest level since February. The deficit this year is running at an annual rate of $705.5 billion, 7 percent lower than last year's record deficit of $758.5 billion.

Analysts forecast that this trend will continue and allow the United States to record an annual drop in the deficit for the first time after five straight record imbalances.

Economists noted that the June deficit was much smaller than the one assumed by the Commerce Department when it published its preliminary figure for overall economic growth in the April-to-June quarter.

With consumer spending and confidence under pressure from a slumping housing market and recent turbulence in the financial markets, the boost from export growth will help ward off the threat of a recession, analysts said.

"The economy needs something to step up and lead it forward, and it looks like the export sector has become that savior," said Joel Naroff, chief economist at Naroff Economic Advisors, of Holland, Pa.

U.S. exports and imports both set records in June. Exports of goods and services rose 1.5 percent to $134.5 billion, reflecting big increases in shipments of semiconductors, autos, and farm products such as corn and meat.

Imports also set a record, rising 0.5 percent to $192.7 billion as foreign crude oil rose to the highest level in nine months, reflecting a big jump in prices.

While the overall deficit declined in June, the imbalance with China rose 5.7 percent to $21.2 billion. For the first half of this year, the deficit with China is up 15.3 percent over the same period in 2006, putting the country on track to surpass last year's record deficit with China of $233 billion.

This widening deficit is occurring even though Chinese products including toothpaste, tires, toys and pet-food ingredients have been hit by recalls. Toy giant Mattel Inc. announced yesterday that it was recalling nine million Chinese-made toys because of dangers to children from lead paint or tiny magnets that could be swallowed.

The 0.6 percent rise in wholesale prices was far above the 0.1 percent increase analysts had been expecting. It reflected a 2.5 percent jump in energy prices, which reversed a 1.1 percent decline in the previous month. Food prices dropped for a third straight month.

Core wholesale inflation, which excludes volatile food and energy costs, rose a much more moderate 0.1 percent, even better than the 0.2 percent gain analysts had expected.