Strong American spending and rising oil prices drove up the US trade gap to a record in April, stoking worries a declining US dollar and faltering stock market could drive off crucial foreign investors and ultimately crimp economic growth.
The US trade deficit in goods and services widened to a record $35.9 billion in April, as imports far outpaced Americans exports, the Commerce Department said.
Rising oil prices were a key factor in boosting imports, with the price per barrel of crude oil posting the largest monthly gain in nearly 12 years.
The deficit in the US current account - the broadest measure of trade because it includes investment flows as well as goods and services - mushroomed to a record $112.5 billion in the first three months of this year.
That was up sharply from the fourth quarter of 2001's revised estimate of $95.1 billion.
Economists and major US trading partners have long worried that the current account gap, which amounts to about four per cent of US gross domestic product (GDP), might not be sustainable as leery foreign investors flee from once-safe havens like the dollar and stock market.
"It's a law in economics that trade deficits must be financed by foreign sources of capital," said Ken Mayland, economist with ClearView Economics in Pepper Pike, Ohio. "If US stock prices were rising nicely then the foreign funding might come willingly."
The booming US economy of that late 1990s with its huge acceleration in worker productivity attracted hordes of foreign investors. But questions about the strength and durability of the recovery from last year's shallow recession have weighed on financial markets and pushed down the mighty greenback.
The dollar took a further hit Thursday, as the record-breaking trade data sent out a message to markets that it will take even more capital flowing into the United States to make up for dollars sent abroad to purchase imports.
The currency failed to take heart from other reports on Thursday showing a continued US recovery, albeit a halting one and with only modest improvements on the labor front.
The number of workers lining up for jobless benefits declined last week, manufacturing in the mid-Atlantic region picked up and the economy is on track to strengthen in the second half, those other reports showed.
Manufacturing activity, the hardest hit sector in the recession, surged in the US mid-Atlantic region in June at its fastest pace in four years, according to the the Federal Reserve Bank of Philadelphia's business conditions index.
But in a sign the pickup in activity is not translating into new hiring, the bank's employment index fell back into negative territory, indicating further layoffs regionally.
Still, nationwide, the number of workers lining up for first-time jobless benefits declined slightly last week remaining under the key 400,000 mark for the third straight week, according to the Labor Department
Another chief forecasting gauge - the Index of Leading Indicators - released by the New York-based Conference Board on Thursday, rose 0.4 per cent in May, pointing to a slow recovery with strength in consumer spending and investment.
"What we have in the first half of the year is a weak recovery with pockets of strength," Goldstein told Reuters. "There is no risk of a double dip... but we are not looking at a roaring recovery yet."
Even with the other data, most economists remained focused on the record trade deficit.
Analysts now say that with a depreciating dollar, it will take more from Americans to buy the same volume of imports, ultimately weighing on GDP growth.
"If the monthly shortfall stays at the April level, trade will subtract approximately 1.4 percentage points from GDP growth (this year)," said Mike Moran, Chief Economist at Daiwa Securities America in New York.
Other economists agreed that GDP will suffer. "The trade figures suggest net exports will take a chunk out of GDP in the second quarter, though only a moderate one," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets in New York. "But equally the rise in imports points to still strong domestic demand, so from that view it's a positive indicator."
While economists say a wider gap between exports and imports could dampen economic growth down the road, these reports also offer some good news.
"Consumers are showing continued signs of activity, thereby implying that we are moving toward a more sustainable growth path," said Anthony Chan, Chief Economist at Banc One Investment Advisers in Columbus, Ohio.
The drop in jobless claims also pleased some analysts. "There are signs in the number that the labor market has begun to improve," said Michael Strauss, Senior Economist at Commonfund in Wilton, Conn. "We are now beginning to see the effects of a better economy."