U.S. reaches record for trade deficit

WASHINGTON -- The U.S. deficit in the broadest measure of international trade surged to an all-time high last year, increasing a potential threat to the economy as the country sank deeper into debt to Japan, China and other nations.

The Commerce Department reported Wednesday that the deficit in the U.S. current account increased by 25.5 percent last year to a record $665.9 billion. Forecasters said the 2005 deficit could be $100 billion higher than that as the United States continues to buy record levels of foreign consumer goods and oil.

The current account deficit represents the total amount of financing the United States needs to cover its international accounts and thus covers all aspects of foreign trade, from goods and services to investment flows among countries.

So far, foreigners have been quite happy to sell to Americans cars, computers and clothing, and accept dollars in exchange. That money then is invested in the U.S. stock market, corporate bonds and Treasury securities.

Analysts worry the deficits are now so high that foreigners could at some point lose their appetite for dollar-denominated investments. That could lead to a rush for the exits, plunging the value of the dollar and stock prices while causing interest rates to soar.

Under that scenario, the higher interest rates would act as a severe drag on the U.S. economy. They would forced up borrowing costs, for example, for home mortgages, auto loans and the investment spending businesses need to expand.

The soaring current account deficit, a record high close for oil prices at $56.46 per barrel and disappointing earnings expectations from General Motors Corp. combined to send stocks sharply lower on Wall Street. The Dow Jones industrial average lost 112.03 points to close at 10,633.07.

Analysts noted that the current account deficit is a record in dollar terms and in relationship to the total economy: 5.7 percent of the gross domestic product last year, compared with 4.8 percent in 2003.

"We can't keep running current account deficits at these levels. It means we are borrowing nearly 6 percent of our GDP from the rest of the world and the gap is growing," said David Wyss, chief economist at Standard & Poor's in New York.

Of as much concern to some analysts is that foreign governments are providing an increasing percentage of the borrowing needed to finance the trade deficit as well as the country's record federal deficits.

A Treasury report this week showed that foreigners now hold $1.96 trillion in Treasury securities, 45 percent of the total that is publicly traded. Japan has the largest holdings at $701.6 billion, followed by China at $194.5 billion.

In recent weeks, a South Korean official and the Japanese prime minister suggested that their countries may want to diversify their foreign holdings into currencies other than the dollar. Their comments dropped the dollar on world currency markets until both governments rushed in with clarifying comments.

Democrats blame the Bush administration for the record trade deficits. The lawmakers say the country has not done enough to crack down on unfair trade practices that, the Democrats contend, have meant the loss of millions of U.S. manufacturing jobs.

The United States ran up a $162 billion deficit in goods with China last year, the largest ever with any country. Critics charge China is manipulating its currency to keep it undervalued by as much as 40 percent against the dollar, giving Chinese companies a tremendous competitive advantage.

The Bush administration has pressured China to allow the value of its currency to be determined by open markets.

The dollar has fallen significantly over the past three years against the 12-nation euro, the British pound and the Canadian dollar, but that improvement has not shown up in an improving trade deficit because of the currency manipulation in Asia, analysts said.

For 2004, the current account deficit reflected a shortfall of $665.5 billion in goods, compared with a goods deficit of $547.6 billion in 2003. The surplus in services shrank to $48.4 billion.

In other economic news, the government reported that construction of new homes and apartments rose by 0.3 percent in February to an annual rate of 1.775 million units, a 21-year high.

Industrial output, bolstered by gains in manufacturing, rose by 0.3 percent in February.