US trade gap narrows despite higher oil prices

The US trade deficit shrank unexpectedly in May, helping to shore up the weak US economy, even though average prices for imported oil surged during the month to a record $106.28 per barrel, a Commerce Department report showed yesterday.

The trade gap narrowed to $59.8 billion, from $60.5 billion in April, as both exports and imports rose to record highs.

Wall Street analysts had expected skyrocketing oil prices to widen the deficit to $62.5 billion in May. But as prices surged, the volume of oil imports plunged 10.5 per cent to their lowest level since September 2002.

The slight drop in the deficit was a "pleasant surprise" that shows exports are a source of strength in an otherwise weak US economy, said Ken Mayland, president of Clearview Economics in Pepper Pike, Ohio.

The inflation-adjusted "trade deficit fell more than $3 billion in May, which is a huge amount. What that means is the foreign trade number will make a substantial contribution to the second-quarter" economic growth, Mr Mayland said.

Ian Shepherdson, chief US economist at High Frequency Economics, said he now expected trade to boost second-quarter economic growth to more than three per cent.

The strength in the trade sector, which is often blamed for US job losses, shows how the mortgage market crisis has turned the US economy "on its head," said Joel Naroff, president and chief economist of Naroff Economic Advisers.

"Housing is now the 'American Nightmare' while trade is our salvation," Mr Naroff said.

Other data showed US consumer confidence rose unexpectedly in early July from a 28-year low with the help of retail discounts. But the Reuters/University of Michigan Surveys of Consumers also showed a vast majority think the country is in deep recession.

Financial markets paid scant attention to the reports, focusing instead on whether the federal government would bail out US mortgage agencies Fannie Mae and Freddie Mac.

The dollar fell against both the euro and yen after US Treasury Secretary Henry Paulson gave no indication of quick action and stocks extended losses.

Oil futures prices jumped to a record above $147 a barrel on fears of supply disruptions in Iran, Nigeria and Brazil.

US exports, helped by the weak dollar, rose 0.9 per cent in May to a record $157.5 billion, including individual records for exports to Canada, the European Union and South and Central America, the department said.

Record exports of industrial supplies and materials - including a record $5.7 billion worth of oil - led the rise, with a smaller increase for auto and auto parts. Consumer good exports rose slightly to a record.

US imports rose 0.3 per cent to a record $217.3 billion. Overall imports of non-petroleum goods set a record, as did three smaller categories: food, feeds and beverages, capital goods and consumer goods.

Crude oil imports were a record $31.2 billion, as prices rose $9.47 per barrel in May - the biggest one-month jump ever. But crude oil import volume fell to 294 million barrels in May, from 303 million in April.