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U.S. trade gap shrinks
July 19, 2001: 1:01 p.m. ET

Trade deficit shows unexpectedly large drop in May; leading indicators rise
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NEW YORK (CNNfn) - The U.S. trade deficit fell in May to its lowest level in more than a year, the government said Thursday, while an index of future economic activity rose in June -- both figures showing signs of strength in the sluggish U.S. economy.

The nation's trade gap shrank to $28.34 billion from a revised $31.99 billion in April, the Commerce Department reported. Economists polled by had expected a much larger deficit of $32 billion.

The trade gap is the narrowest since a $26.36 billion deficit in January 2000.

Exports rose to $87.73 billion in May from $86.93 billion in April. But imports plunged to $116.07 billion -- their lowest level since February 2000 -- from $118.92 billion in April.

An increase in exports could boost the government's estimate of U.S. gross domestic product (GDP), the broadest measure of the nation's economy, for the second quarter.

"I don't put a lot of faith in the month-to-month swings in the trade data, but we had expected a modest widening in the gap," said Kim Rupert, senior economist with MMS International. "This narrowing will feed into a little bit more positive reading to second-quarter GDP."

U.S. Treasury bond prices fell after the news. U.S. stocks rose in early trade, but gave up some of those gains in part because of a weaker-than-expected reading of mid-Atlantic-region manufacturing activity.

The Federal Reserve Bank of Philadelphia said its business conditions index fell to negative 12.2 in July from negative 3.7 in June. Analysts polled by expected a reading of negative 1.0. The Philly Fed's survey is the first major monthly indicator of manufacturing activity, and a number below zero indicates contraction.

Leading indicators rise in June

Separately, the Conference Board, a New York-based business research group, reported its Index of Leading Indicators rose 0.3 percent in June to 109.6, slightly above Wall Street forecasts, after rising a revised 0.4 percent in May.

It was the third straight monthly increase in the closely watched barometer of future economic activity, gains the Conference Board attributed in part to six aggressive interest-rate cuts by the Federal Reserve.

"The recovery in the leading index could indicate that the economy is poised for growth by late summer," Conference Board economist Ken Goldstein said. "There appears to be enough economic demand to end the slide in industrial production, though no strong rebound appears in sight."

The Conference Board said five of the 10 components that make up the leading indicators index increased last month: money supply, vendor performance, interest rate spread, average weekly initial claims for unemployment insurance and index of consumer expectations.

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On Thursday, the U.S. Labor Department reported 414,000 new claims for unemployment benefits in the week ended July 14, down from an upwardly revised 449,000 the prior week -- meaning the slowdown continues to pinch the job market, though the pressure may be easing.

In order to keep U.S. consumers spending despite hundreds of thousands of job cuts, the Fed has slashed its target for short-term interest rates from 6.5 percent to 3.75 percent this year. Wednesday, Fed Chairman Alan Greenspan hinted another cut may be on the way.

Thursday's trade-gap data could be good news for U.S. workers if it means U.S. businesses are selling off their backlog of goods. Once inventories get to an acceptable level, companies can start producing again, creating more jobs. But economists aren't convinced that's happened yet.

Calls for a weaker dollar

"Exports increased by such a small amount, it's not enough to tell me the inventory problem is going to go away," said Anthony Chan, chief economist with Banc One Investment Advisors. "We need world economic growth to start picking up."

But world economic growth might not recover until the robust dollar loses some of its strength. U.S. business, labor and farm groups have asked President Bush to take steps to deflate the dollar to boost overseas demand.

Though exports of U.S. goods rose in May to $62.8 billion -- led by increased sales of capital goods, automobiles and auto parts and consumer goods -- and service exports rose to a record $24.9 billion -- mostly reflecting increases in travel, passenger fares and other private services -- that doesn't necessarily mean the dollar is any weaker.

"What we need to weaken the dollar is [a] European Central Bank [interest-rate] easing," Chan said. "That would make our relative growth level that much less than Europe's and make Europe more competitive."

The ECB decided Thursday to keep interest rates unchanged at 4.5 percent. graphic

- from staff and wire reports