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Trade Deficit Falls Unexpectedly

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WASHINGTON — The U.S. trade deficit has gone on a diet, helped by strong exports of farm products and manufactured goods and by Americans spending less as the economy limps along.

The deficit for June fell by 4.1 percent to $56.8 billion. That's the lowest level in three months and a surprise to economists who had expected an increase reflecting a big surge in oil prices during the month, the Commerce Department reported Tuesday.

While oil prices did rise to a record level, exports of everything from soybeans and corn to aircraft engines and heavy machinery surged by the largest amount in four years, offsetting the rising oil bill.

The better-than-expected June performance left analysts revising up their estimates for overall economic growth in the April-June quarter to as much as 3 percent. That would be more than a full percentage point higher than the 1.9 percent initial estimate for GDP growth.

Wall Street, however, was unimpressed by the June trade performance. Stocks took a tumble as gloomy news from JPMorgan Chase & Co. and other financial firms raised new anxieties about the continuing impact of a severe credit crisis on the economy. The Dow Jones industrial average fell 139.88 points to close at 139.88.

Over the past four quarters, trade has been the economy's standout performer. It has contributed four-fifths of what little growth there has been while the country has been battered by the worst housing slump in more than two decades, a severe credit crisis, rising unemployment and soaring energy costs.

Without the boost from trade, economists believe the country would almost certainly be in a recession at the moment. Analysts worry about how long the export boom can last, however, given that two of America's biggest overseas markets, Europe and Japan, are flirting with recessions.

"The more severe their slowdown, the greater the likelihood that it will begin to cool the boom in exports," said Nigel Gault, an economist at Global Insight, a Lexington, Mass., forecasting firm.

But other analysts said that exports have built up so much momentum that the trade improvement should continue for the rest of the year given the significant decline in the value of the dollar. Even with its recent rebound the dollar is still down significantly against the euro.

"The weak dollar has become a major driver of economic growth," said Joel Naroff, chief economist at Naroff Economic Advisors. He noted that every major export category had posted impressive gains in June on increased sales as U.S. goods become more competitive on overseas markets.

Exports of goods and services rose to a record of $164.4 billion, an increase of 4 percent from May, the biggest percentage gain since February 2004.

Frank Vargo, vice president for international affairs at the National Association of Manufacturers, said the performance of U.S. exports over the past year was "phenomenal" with chemicals, industrial machinery and primary metals leading the way this year.

Imports also rose to a record in June, totaling $221.2 billion, up 1.8 percent from the May level. This increase was driven by a 14.6 percent surge in petroleum imports, which hit an all-time high of $44.5 billion as the average price of a barrel of imported crude jumped to a record $117.13. Demand for many consumer products from clothing to furniture fell sharply as the weak economy dampened consumers' appetites.

Through the first half of this year, the trade deficit is running at an annual rate of $702.8 billion, up only slightly from last year's deficit of $700.3 billion. The 2007 deficit was down 7 percent from 2006, marking the first annual improvement after five straight years of record deficits.

The Bush administration said the continued surge in exports proved the president's trade policies were working to open overseas markets. It said Democrats in Congress should stop delaying votes on three pending free trade agreements with Colombia, South Korea and Panama.

"We see no reason why these agreements should not be done in September," Commerce Secretary Carlos Gutierrez said in an interview. "There is no reason why we should be procrastinating. This is important for our economy and for jobs."

Democratic leaders in Congress say they are delaying votes on the trade bills until the administration resolves various questions that have been raised about the measures and their impact on U.S. jobs.

Critics of the administration's free trade policies contend that even with the surge in exports, the deficits remain far above levels in effect when Bush took office. They contend that the string of record deficits has contributed to the loss of more than 3 million manufacturing jobs since 2001 as many companies moved production to low-wage countries.

Trade is expected to be a major issue in the upcoming presidential campaign. Republican candidate Sen. John McCain said in a statement that the big rise in exports in June "provided an important reminder of the role that exports play in our economy." Presumptive Democratic nominee Barack Obama has been critical of Bush administration trade policies.

The politically sensitive deficit with China rose to $21.4 billion in June, the largest monthly imbalance since a record $25.9 billion deficit with China last October.

Critics accuse China of unfair trade practices such as artificially depressing the value of its currency to boost the competitiveness of Chinese products. The administration, led by Treasury Secretary Henry Paulson, has been prodding China to move more quickly to allow its currency to rise against the dollar and head off Democratic moves in Congress to impose penalty tariffs on Chinese goods over the currency issue.

U.S. exports to Mexico, the European Union and South and Central America all hit records in June.