US TRADE DEFICIT DOWN

- The U.S. trade deficit unexpectedly narrowed in June as exports soared to a record, validating the Federal Reserve's forecast that global demand will help the economy ride out the housing slump.

The gap narrowed 1.7 percent to $58.1 billion from a revised $59.2 billion in May that was smaller than previously estimated, the Commerce Department said in Washington. The deficit with China grew.

The shortfall may continue to narrow as oil prices retreat this month and a weaker dollar and faster growth in Asia, Europe and Latin America keep exports growing. More jobs and improving overseas demand were the two areas highlighted by Fed policy makers last week when they forecast the economy would grow at a ``moderate'' pace in coming months.

``The growth in exports is substantial and reflects the health of the global economy,'' said Drew Matus, senior economist at Lehman Brothers Holdings Inc. in New York.

Prices paid to U.S. producers rose 0.6 percent in July, more than forecast, on higher fuel costs, the Labor Department also reported. Excluding food and energy, the so-called core inflation rate rose less than predicted. The report may help ease Fed concerns that inflation remains the biggest risk to the economy.

U.S. Treasury securities extended losses after the report and stock index futures gained. The yield on the benchmark 10-year note rose to 4.81 percent at 8:53 a.m. in New York, compared with 4.76 percent late yesterday.

Survey Forecasts

The shortfall was forecast to widen to $61 billion from a previously reported $60 billion in May, based on the median estimate of 71 economists surveyed by Bloomberg News. Projections ranged from deficits of $58.6 billion to $63.5 billion.

In June, exports rose 1.5 percent to $134.5 billion, propelled by sales of petroleum products, semiconductors and automobiles. Imports increased 0.5 percent to $192.7 billion, also the highest ever.

Exports of services, foods, industrial supplies and autos all set records in June.

Faster growth abroad is boosting demand for American products. China expanded 11.9 percent in the second quarter from a year earlier and Japan grew 2.3 percent, compared with U.S. growth of 1.8 percent. The economy in the 13 countries that use the euro grew 3.1 percent in the year ended March.

A weaker dollar, by making American-made goods cheaper for foreign buyers, is also helping to spur demand. The dollar has weakened 7 percent since the beginning of 2006 against a basket of currencies from major trading partners, according to Fed figures.

Manufacturing Benefits

U.S. factories are benefiting from the increase in foreign demand. Manufacturing expanded at the fastest pace in 14 months in June, according to the Tempe, Arizona-based Institute for Supply Management. The group's export index in May rose to the highest level since December 2004.

The increase in imports was led by purchases of automobiles, crude oil, commercial aircraft and computers. The demand for foreign-made capital goods reached a record, suggesting business investment may be improving.

After eliminating the influence of prices, the trade deficit narrowed in June to $54.4 billion, the lowest since September 2004, from $54.9 billion. The government uses the inflation- adjusted figures to calculate gross domestic product.

An improvement in the trade deficit is one reason why the economy grew at a 3.4 percent pace in the second quarter, compared with a 0.6 percent pace the previous three months. Trade contributed 1.2 percentage points to growth, surpassing consumer spending for the first time since 1991.

Effect on GDP

The June inflation-adjusted trade gap was smaller than estimated by the Commerce Department in calculating second-quarter growth, signaling the economy grew at a stronger pace than first reported. Lehman's Matus projects growth will be revised up to exceed a 4 percent pace.

Economists are forecasting exports will continue contributing to the expansion, helping to offset the slowdown in consumer spending and the housing slump. Demand for American goods from China, Latin America and the broad category of emerging economies known as newly industrialized countries, all reached records.

Still, inexpensive imports from China have contributed to keeping the trade deficit elevated. The trade gap with China, the second-largest U.S. trading partner after Canada, increased to $21.2 billion in June from $20 billion in May.

Some U.S. lawmakers and manufacturers argue that China has kept its currency artificially low in order to stimulate demand for its exports.

Tariff Legislation

The Senate Finance Committee on July 26 approved legislation that would put higher duties on Chinese imports to compensate for what lawmakers say is its undervalued currency.

President George W. Bush and Treasury Secretary Henry Paulson are opposed to such measures. ``If we arbitrarily protect our markets, other nations will surely protect theirs,'' Paulson said in Billings, Montana, on Aug. 7. ``Retreating to economic isolationism would mean fewer jobs and lower incomes in Montana, the U.S. and around the world.''

U.S. carmakers are among the companies that benefit from inexpensive components produced abroad. General Motors Corp., the largest U.S. automaker, plans to quadruple auto parts purchases from India to $1 billion in three years, buying more from low-cost sources to combat competition from global rivals.

``India has got strengths in certain areas,'' Rajeev Chaba, president and managing director at GM's India unit, said in New Delhi on Aug. 10. ``We will source whatever and from wherever we get the best value for our money.''

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net