Update: Trade Deficit Narrows Slightly - TheStreet

Updated from 9:44 a.m. EDT

The U.S.

trade deficit

narrowed marginally in April, as a decline in the value of imported oil weighed against a largely unchanged level of exports.

The trade deficit, a broad measure of the difference between imports and exports, shrunk in April to $30.44 billion after bulging to an upwardly revised record deficit of $30.61 billion in March, the

Commerce Department

said Tuesday.

The report supports other recent economic measures that have shown that the U.S. economy is slowing as domestic demand edges lower. The deficit has typified the extreme imbalance of supply and demand that the U.S. economy has experienced in the latter years of its decade of steady economic growth.

But the meager pullback in April from March's wide deficit is unlikely to convince economists that U.S. demand has slowed enough to alter the broad international trade behavior of the nation. On one hand, a large trade deficit drags on the overall economic output, but it also highlights the strong levels of consumer demand and business growth that the nation is experiencing.

Moreover, the slightly smaller deficit in April does little to counter the extreme trade imbalance in the first quarter. In the first four months of this year, the trade deficit has widened to an annual rate of $350 billion, leapfrogging last year's record $265 billion deficit.

Some economists say that if the narrower April trade deficit marks the beginning of a trend, it could push the growth rate for U.S.

gross domestic product

lower in the second quarter.

"A weaker trade report reinforces the idea of weaker GDP in the second quarter," said William Dudley, chief U.S. economist at

Goldman Sachs

. "If we persist in May and June even at this relatively slow rate of narrowing, that will shave about a percentage point off of GDP."

The small decline in the trade deficit came as a surprise to Wall Street analysts, who had been expecting the gap to narrow to $29.29 billion, according to a poll of economists by

Reuters

.

A big influence on the April trade deficit was a 3.7% drop in the volume of imported oil and a decline in crude prices, which led to a sharp 11.1% drop in the value of imported oil. That came as oil prices fell sharply in April from their historic March highs near $34 a barrel, pushing the value of oil imports down.

Despite the overall narrowing of the trade deficit, the gap continued to widen with some of the largest U.S. trading partners, such as Japan, China and Canada.

The total value of imported goods and services from foreign countries slipped 0.2% in April to $117.1 billion, the first time imports have decreased in 18 months. The decline was mostly a result of a decrease in imports of goods, which declined to $99.5 billion in April from $99.7 billion in March. Imported services in April were valued at $17.6 billion in April, down from $17.7 billion in March.

Exports remained largely unchanged at $86.7 billion in April, as a decline in foreign demand for U.S.-made industrial supplies and automobiles was offset by a slight boost in demand for U.S.-made civilian aircraft. The flat exports number comes after March's sharp 2.4% boost in exports.

In recent years, the fat U.S. trade deficit has shown the economy's heavy reliance on foreign goods, which in turn has highlighted the nation's dependence on inflows of foreign capital through investments.

Many economists have argued that if the U.S. economy were to turn sharply downward, foreign investors might get nervous and pull some money out of U.S. investments, which would lead to a weaker dollar and a heightened risk of inflation.

"Foreigners seem perfectly happy to hold as many dollars as we shovel out into the world via excess imports," said Bill Cheney, chief economist at

John Hancock Financial Services

. "If their mood changed sharply and swiftly, the dollar might slump, and then we'd feel the deficit's bite."

But thus far, there does not seem to be any substantial loss of global enthusiasm for U.S. investments, even following a sharp pullback in technology stocks. The government also reported that the

U.S. current account deficit

, an even broader measure of the international flow of goods, services, money and investments, climbed to a record of $102.3 billion in the first quarter, up a sharp 6.3% from a $96.2 billion deficit in the fourth quarter of 1999.

"Despite record U.S. foreign trade deficits, the dollar usually has been firm on a trade-weighted basis this year," said Maury Harris, chief economist at

PaineWebber

. "The current U.S. trade deficit is accompanied by a huge federal budget surplus and has reflected import demand from a very strong and healthy private sector, which has had little trouble attracting foreign capital."

But despite the still-strong willingness of foreign investors to continue putting money in U.S. assets, some economists worry that the dollar could be under severe pressure should foreigners decide to pull out of U.S. investments.

"The dependence of the U.S. for capital inflows is continuing to increase. That doesn't cause a big problem as it stands, but if the U.S. economic performance starts to falter, the consequence could be a lot weaker dollar, which comes with its own set of problems," said Dudley of Goldman Sachs.