WASHINGTON – The U.S. current account trade deficit narrowed in the July-September quarter to the smallest level since late 2010, but the improvement may not last.
The deficit fell to $107.5 billion in the third quarter, down 9 per cent from the second quarter imbalance of $118.1 billion, the Commerce Department reported Tuesday. It was the lowest trade gap since the final three months of 2010.
The current account is the broadest measure of trade. It tracks the sale of merchandise and services between nations as well as investment flows. Economists watch the current account as a sign of how much the United States needs to borrow from foreigners.
Many economists predict the deficit will widen in coming quarters, in part because a global slowdown is dampening demand for American exports.
A debt crisis has pushed much of Europe into recession. The region accounts for about one-fifth of U.S. export sales. And other major export markets, including China, India and Brazil, have experienced slower growth.
The current account deficit hit an all-time high of $800.6 billion in 2006. It then shrank after a deep recession reduced U.S. demand for foreign goods by a greater amount than U.S. export sales diminished. The trade gap began widening again after the recession ended in June 2009.
The improvement in the current account in the third quarter reflected a decline in the deficit on goods and a small increase in the surplus on services, led by a gain in foreign earnings made by U.S. companies providing financial services, insurance and professional services. The surplus on investment earnings narrowed to $50.8 billion, down from $52.1 billion in the second quarter.
The narrowing of the deficit in the third quarter left it at a level equivalent to 2.7 per cent of the total economy, down from 3 per cent in the second quarter. The third quarter deficit represented the smallest percentage of the economy since the spring of 2009.
Paul Ashworth, chief U.S. economist at Capital Economics, said that most of the improvement reflected a decline in America’s foreign oil bill. He predicted that the deficit will remain close to 3 per cent of the total economy or slightly below through all of next year.
The deficit in the monthly trade report, which just tracks merchandise and services, increased in October as U.S. exports fell by a larger margin than imports, a development that was seen as a sign that slower global growth was beginning to weigh on the U.S. economy.
The overall economy grew at an annual rate of 2.7 per cent in the July-September quarter, but many economists believe growth has slowed to less than 2 per cent in the current quarter. They believe that consumers and businesses have grown more cautious about spending and making investments because of the uncertainty over what Congress will do about the “fiscal cliff.”
That is the term used for the increases in taxes and spending cuts that will occur automatically in January unless Congress and President Barack Obama reach a budget deal to avert them. Economists have warned that the adverse impact on the economy will be great enough to push the country back into a recession.