Trade deficit falls to $36 billion in January, lowest in six years

WASHINGTON -- The U.S. trade deficit plunged in January to the lowest level in six years. While U.S. exports -- from farm goods to autos to civilian aircraft -- fell sharply, imports fell at an even faster clip as a deepening recession cut demand for goods from abroad.

The Commerce Department said Friday the trade imbalance dropped to $36 billion in January, a decline of 9.7 percent from December and the lowest level since October 2002.

While the improvement was better than the $38 billion deficit that economists had expected, they did not see the development as good news for the economy. Imports were down because of the severe recession, already the longest in a quarter-century, and the spreading weakness globally cut even further into U.S. exports, which had up until recently been one of the few bright spots for the economy.

U.S. manufacturers are now confronted with a darkening picture in which demand for their products is dropping sharply not only at home but also in foreign markets.

For January, exports of goods and services fell 5.7 percent to $124.9 billion. It was the sixth straight month that exports have fallen, pushing them down to the lowest level in more than two years. Demand fell across a broad spectrum of manufactured goods from heavy machinery to telecommunications equipment. Commercial aircraft shipments dropped by 5.1 percent and sales of U.S.-made autos and auto parts plunged by 28.3 percent.

The reason that the trade deficit narrowed was that imports fell even more sharply in January, declining by 6.7 percent to $160.9 billion, the lowest level for imported goods since March 2005. The decline in imports was led by a 25.2 percent drop in imported crude oil, which fell to $11.9 billion in January with both the level and the average per barrel price dropping to three-year lows.

Economists called the export decline alarming, predicting that it would add to the woes of an economy that was already shrinking at the fastest pace in a quarter-century. The 6.2 percent rate of decline in the gross domestic product in the fourth quarter could be exceeded in the current quarter if exports continue to plunge, analysts said.

"The forces pulling down U.S. activity go far beyond the consumer. Many foreign economies have been hit even harder by the recession than the U.S. and we are seeing severe consequences for U.S. exporters," said Nigel Gault, chief U.S. economist for IHS Global Insight. "Exports are a huge drag on manufacturing right now."

Many of the nation's biggest companies, which do a large share of their business overseas, are struggling with the effects of the global drop in demand. More than 75 percent of the orders for commercial planes that Boeing Co. held last year came from outside North America, as did about 60 percent of Caterpillar Inc.'s sales of heavy machinery and engines.

Both companies are forecasting lower results this year and slashed jobs. Boeing has said it plans to cut 10,000 jobs in its commercial and military divisions while Caterpillar said it will trim 22,000 positions.

America's deficit with many of its trading partners declined sharply although the politically sensitive imbalance with China bucked the downward trend, rising by 3.5 percent to $20.6 billion. U.S. exports to China plunged by 19.7 percent, a much bigger drop than the 1.3 percent decline in Chinese goods shipped to the United States.

U.S. manufacturing companies who have been battered by what they view as unfair competition from China said that the continued high deficit with China, the largest U.S. trade gap with any nation, pointed to the need for the Obama administration to take a tougher line than the Bush administration with China.

"The United States will not be able to jump-start its economy unless it stops trade cheats like China from decimating U.S. manufacturing," said Auggie Tantillo, the executive director of the American Manufacturing Trade Action Coalition, a group which is pushing the new administration to impose trade sanctions to punish China for pursuing policies they contend violate global trade rules in such areas as government subsidies and management of its currency.

In a warning to resist protectionist pressures, Chinese Premier Wen Jiaboa noted at a news conference Friday that China is America's largest foreign creditor. He called on the United States to make sure that its response to the global downturn does not damage the value of Chinese holdings of American Treasury bills and other investments. "We have made a huge amount of loans to the United States. Of course, we are concerned about the safety of our assets," he told reporters in Beijing.

The U.S. trade deficit for all of 2008 totaled $681.1 billion, the lowest level since 2004 and the second year of a decline after the deficit had posted records for five straight years. Many economists are looking for the overall deficit to fall to perhaps half the level of last year's imbalance, a forecast based on oil prices remaining well below last year's record highs.

By country, the U.S. deficit with Canada, America's biggest trading partner, dropped in January by 10.7 percent to $2.5 billion, the lowest imbalance since May 1999. The deficit with Japan fell 18.4 percent to $4.3 billion, the lowest trade gap with that country since January 1998, while the deficit with the 27-nation European Union plunged 50.1 percent to $3.5 billion.

Many economists are worried that the spreading global economic weakness could prompt countries to resort to raising trade barriers in an effort to protect their domestic industries.

Treasury Secretary Timothy Geithner began a two-day meeting in Britain on Friday with finance ministers from the Group of 20 countries, which include the world's wealthiest economies and major developing countries such as China, Brazil and India. President Barack Obama is pushing the G-20 nations to adopt sizable economic stimulus programs to jump-start their stalled economies and get the global economy back on track. The U.S. Congress recently passed a $787 billion stimulus package that had been championed by Obama.