Trade deficit in third quarter falls to 2-year low

AP Economics WriterWASHINGTON (AP) -- The U.S. deficit in the broadest measure of foreign trade fell to $94.98 billion in the July-September quarter, the smallest in nearly two years, reflecting an American economy in recession and huge foreign insurance payments from the Sept. 11 terrorist attacks.

The Commerce Department said the deficit in the current account dropped by 11.7 percent from an April-June imbalance of $107.58 billion. That was the smallest trade gap since a deficit of $92.47 billion in the final quarter of 1999.

The current account is considered the broadest measure of trade because it covers not only the flow of goods and services across borders but also the flow of investments and items such as foreign aid.

For all of 2000, the current account deficit hit a record $444.7 billion, prompting concerns among economists that unless the imbalance began to shrink the United States could begin to have serious problems attracting the foreign capital needed to finance such a huge deficit.

While the deficit did shrink in the third quarter, the improvement came for all the wrong reasons -- imports fell because of weakening U.S. demand, reflecting the first recession in a decade.

Another factor helping to narrow the deficit was a widening in America's surplus in services trade as a result of $11 billion in foreign insurance payments tied to the Sept. 11 terrorist attacks. In the government's accounting system, the claims that must be paid by foreign insurance companies acted to lower the trade deficit.

The administration won a big trade victory last week when the House by a single vote passed President Bush's request for fast-track trade promotion authority. The measure, which will allow the president to pursue his ambitious negotiating agenda, now goes to the Senate, where it is expected to win approval early next year.

Bush had lobbied hard for the proposal, which he needs to complete a new round of global trade talks and finish negotiations for creation of the world's largest free-trade zone, covering all the countries of the Western Hemisphere except Cuba.

The administration was hoping that a rebound in U.S. exports would help lead the country out of recession by lifting the fortunes of the battered manufacturing sector.

However, the weakness in the United States has spread to most of America's major trading partners, making it unlikely that they will be able to boost purchases of American products any time soon.

In an effort to boost domestic demand, the Federal Reserve on Tuesday cut interest rates for the 11th time this year, pushing a key rate to a 40-year low of 1.75 percent.

Many economists say the Fed's aggressive credit easing plus an economic stimulus package they hope will win congressional approval will be enough to end the recession, which began in March, by early next year.

The improvement in the current account in the July-September period reflected a narrowing in the deficit on goods to $105.8 billion in the third quarter, down from $107.66 billion in the second quarter.

America's surplus in services, helped by the surge in foreign insurance payments, rose to $28.2 billion in the third quarter, up from $17.1 billion in the second quarter.

The deficit in investment flows was essentially unchanged in the third quarter at $5.04 billion.

That figure reflects the fact that foreigners' earnings on U.S. investments now surpass Americans' earnings on their overseas investments. For years, the United States enjoyed a surplus in the investment category but that was wiped out by the huge merchandise trade deficits the country has been running since the 1970s.

To pay for those merchandise deficits, billions of dollars were transferred into the hands of foreigners, transforming the United States from the largest creditor country to its current status as the world's largest net debtor, meaning that foreign holdings of U.S. assets far exceed American holdings of foreign assets.

The final category of the current account, unilateral transfers, which covers foreign aid, rose slightly to $12.36 billion in the third quarter.

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