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NEWS ANALYSIS : U.S. Economic Outlook Better Than It Seems? : Trade: New figures indicate largest trade deficit in seven years, but American exports are seen as poised for huge rally.

July 20, 1994|JONATHAN PETERSON | TIMES STAFF WRITER

The trade deficit ballooned in May to $9.2 billion, in what could be lamented as the latest U.S. setback in a hostile world economy.

On the surface, the news might seem bleak: The 1994 trade gap is on track to be the largest in seven years, and imports flooded in at record levels, according to Commerce Department figures released Tuesday.

But high anxiety over the trade gap and the dollar's recent assault in currency markets is distracting attention from a much more positive reality, economists say. U.S. exports are finally poised for a rally, one that could provide a crucial boost to the aging national recovery in coming months.

The key: a fortuitous turn of the economic cycle, with major overseas economies in Japan and Western Europe starting to recover--just when the U.S. recovery may be slipping past its prime.

"We're counting on exports to help keep the expansion going in 1995 and 1996," said Robert F. Wescott, chief economist at the White House Council of Economic Advisers.

Such hopes might sound surprising in light of the recent evidence. The trade gap--the difference between how much the nation buys from abroad and how much it sells--surged almost 8% in May, the Commerce Department reported Tuesday.

The deficit in goods is headed beyond $140 billion this year, the worst performance since 1987. Overall trade with Western Europe stands out as a weak spot, economists said, with last year's U.S. surplus sinking to a $1.5-billion deficit so far this year.

Nevertheless, "the real story is that the United States is becoming more competitive," said economist David B. Bostian Jr.

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Indeed, the U.S. recovery's life span and vitality could be influenced heavily by this little-understood reality. In a new blue chip survey of 50 economists, American exports to foreign customers topped the list of forces seen as strengthening the national economy next year.

Analysts say an unusual confluence of forces could magnify the significance of foreign consumers to America's recovery in the coming months.

Already, U.S. makers of cars, chemicals, paper goods and other products are enjoying a rising demand for their products, following a notably weak 1993.

On the Gulf of Mexico, Union Carbide factories have stepped up sales of specialty petrochemicals used for paint solvents to meet European demand that has increased about 5% in recent months.

"We've seen a gradual but noticeable improvement since the beginning of the year," said Irv H. Agard, Union Carbide's director of financial planning and analysis.

Late last year, executives at paper maker Georgia-Pacific Corp. noticed a jump in demand from their customers in Italy and Britain. As the pickup spread to Germany and France, it has tested the limits of their U.S. mills, already straining near capacity.

"The demand from customers is beyond what we can supply," company spokesman Ken Haldin said.

For all its seeming gloom, at least a few clues to the shifting picture can be found in the fine print of Tuesday's trade report.

So far this year, U.S. exports of industrial engines are up 20% over the first five months of 1993, for example. Exports of computers are up 13%, semiconductors 30% and telecommunications equipment 21%.

"We're increasingly competitive in the areas that are important to us," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

Overall, U.S. merchandise exports are up 5.7%, according to the latest data; that is somewhat higher than last year's rise of 3.7%.

The gains, while limited, encourage those who are searching for continued sources of U.S. growth. The peak levels of housing and auto sales, for example, may already be over, many believe, factors that could slow the economy in 1995.

"That leaves you one thing: exports," Bostian said. "It's a critical bright spot."

Optimists also cite a somewhat crumpled dollar as a sign of trade gains to come.

The greenback's recent travails in the global currency markets have inspired disturbing headlines and been explained as a rebuke to U.S. leadership in the world. But when it comes to exports, the reality of the slide is benign.

The reason: A cheaper dollar may translate to cheaper prices against products from America's strong-currency rivals, notably Japan and Germany.

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In addition, some experts believe that a much more intriguing phenomenon is taking place than a mere shift in the exchange rate or turn in the business cycle.

Recent progress in U.S. technology, quality and manufacturing efficiency are increasingly being rewarded in the global marketplace.

"There is something at work other than economic growth and changes in the dollar," said Ross C. DeVol, an economist with WEFA Group in suburban Philadelphia. "Our underlying competitiveness has improved."

DeVol believes he sees evidence of the fundamental change in America's recent trade performance with Britain and Canada.

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