A record-smashing $16.5 billion trade deficit in July posed potentially big trouble Friday for the dollar, interest rates and perhaps the entire U.S. economy.
It was the fourth straight monthly rise in the deficit, which is climbing this year at a record annual rate. It broke the previous monthly record of $16.05 billion set in July, 1986.
Special factors tipped the latest figures into record-breaking territory, but economists said the lack of improvement in the nation`s trade figures after a big drop in the dollar is a major disappointment.
”It`s certainly bad news for the dollar,” said Scott Pardee, vice president and economist for Yamaichi International (America) Inc., a Japanese dealer in government securities.
”This is going to lead to a downward ratcheting of the dollar and an upward ratcheting of interest rates,” said Steven Roach, economist at Morgan Stanley & Co., the large U.S. investment banking firm.
They and other economists said the pressure will rise on the Federal Reserve Board to raise interest rates still further to defend the dollar and hold down inflation. A week ago, the central bank boosted interest rates to shore up a falling dollar.
If the Fed squeezes tightly in supplying money, it could slow down the economy as interest rates rise, analysts said. Already mortgage interest rates are going up. And economist David Jones of Aubrey Lanston Inc., a large government securities dealer, said mortgage rates will rise more.
Jones said that while the stock and bond markets shook off the bad trade figures in early trading, the deficit will have a negative impact on both during the next few weeks.
Indeed, the initial positive response of financial markets to the bad news was something of a surprise.
”It`s hard to understand market psychology,” said Michael Penzer, vice president and economist for the Bank of America. ”Maybe the market had been in such a bearish mood all week long that it had already discounted the figures. Getting the actual numbers may actually have been a relief.”
Penzer said the same thing happened four weeks ago when June`s figures came out, but then a week later the markets began to turn downward.
The deficit widened because the value of imports rose by 1.8 percent and the value of exports fell by 0.6 percent, resulting in an $800 million worsening in the trade deficit from a month earlier.
Imports reached $37.48 billion and exports eased back to $21.01 billion, the report said. The Commerce Department rounded off the deficit at $16.5 billion.
Increased oil imports accounted for $700 million of this deterioration. In one sense, said Brookings Institution economist Charles Schultze, this is good news because it represents stockpiling by oil firms that won`t be repeated later.
”The real news, though, is that things got no better in July,” said Schultze. ”Many of us have been waiting for a long time for what we thought would be a turnaround. It hasn`t happened, and that`s what`s bothersome.”
Jerry Jasinowski, chief economist for the National Association of Manufacturers, said the figures were ”very bad news” because exports from some of the nation`s leading industries declined.
Part of the reason for the deficit jump lies in seasonal factors, economists said. The trade figures normally get worse in July, and then improve in August. But Roach said he wouldn`t make too much of such technicalities because the red ink is so bright.
The deficit is being driven largely by the fact that U.S. consumers like imports and the U.S. economy is rising solidly, analysts said. If consumers weren`t buying at such a brisk clip in the nation`s stores, the trade deficit would improve.
Clayton Yeutter, President Reagan`s special trade representative, issued a statement that took the bright side. While he called the deficit a disappointment, he said ”the U.S. economy would not be able to absorb such a high level of imports if it were not expanding at a healthy pace. Strong consumer demand in the U.S., brought on by record employment levels, continues to be a major factor in the persistently high trade deficit.”
If the figures are adjusted for inflation, Yeutter contended, they show that the trade deficit has turned around-a fact that does not impress the markets much.
He said the figures ”should not become an excuse for special-interest protectionism,” a feature of massive trade legislation being considered by Congress and opposed by the Reagan administration.
