Trade deficit rises to second highest level this year, reflecting jump in foreign oil bill

By MARTIN CRUTSINGER

AP Economics Writer

WASHINGTON America's trade deficit rose to its second highest level of the year, reflecting higher prices for foreign oil and a continued appetite for Chinese goods despite this year's recalls of tainted products.

The Commerce Department reported that the deficit for May rose to $60.04 billion, up by 2.3 percent from the April level. Most of the increase reflected a big jump in energy imports, which climbed to the highest level in nine months.

The deficit with China rose to $20.02 billion, the biggest imbalance in four months. So far this year, the deficit with China is running 17.2 percent ahead of the pace set last year when the overall deficit soared to an all-time high of $233 billion.

In other economic news, the nation's big retail chains reported lackluster sales in June as consumers, battered by high gasoline prices and the weak housing market, cut back on their purchases of discretionary items such as clothing.

According to a tally by Thomsan Financial, 12 big retailers beat sales expectations while 16 missed projections in June. Among those with disappointing results were Macy's Inc. and AnnTaylor Stores Corp. But Wal-Mart Stores Inc., the world's biggest retailer, surpassed analysts' expectations by putting a renewed emphasis on low prices.

Meanwhile, the Labor Department reported that the number of laid-off workers filing unemployment claims dropped to 308,000 last week, the lowest level in almost two months and a decline of 12,000 from the previous week.

The ballooning deficit with China has led to increasing calls for a crackdown on what critics see as China's unfair trade practices in such areas as currency manipulation and copyright piracy. Critics have also seized on a string of recalls this year of everything from pet food tainted with an ingredient imported from China to Chinese-made toys, tires and toothpaste as evidence that consumers' safety is being jeopardized by lax Chinese inspections.

The May trade flows, which occurred before most of the recalls were announced, showed strong demand for Chinese products with imports rising by 4.6 percent to $25.3 billion. The increase was led by clothing and textiles but also included shipments of fish and shellfish. In June, the Food and Drug Administration banned the import of five types of seafood from China after finding unacceptable levels of certain types of drugs.

So far this year, the overall deficit is running at an annual rate of $709 billion, down 6.5 percent from last year's $758.5 billion, which marked the fifth consecutive year that the deficit set a record.

Despite the widening gap with China, analysts are looking for the overall deficit to improve this year as U.S. exports benefit from strong growth in overseas markets and the falling value of the dollar against the euro and many other currencies. A weaker dollar makes U.S. goods cheaper in overseas markets while making imports more expensive and thus less attractive for U.S. consumers.

For May, exports of goods and services rose 2.2 percent to an all-time high of $132 billion, reflecting big gains in sales of American-made aircraft, electronic products and oil drilling equipment.

Imports also set a record, rising by 2.2 percent to $192.1 billion. The increase was dominated by a 6.2 percent jump in petroleum products, which rose to $26.6 billion, the highest level since last August.

The Chinese government, seeking to reassure the world that it is serious about cracking down on unsafe practices, announced Thursday that it will begin a daily food safety reporting system next month during test events for the 2008 Beijing Olympics.

Private economists said that the recent food and safety problems were unlikely to have much of an impact on Americans' purchases of Chinese products, predicting that consumers will continue to demand the low prices that Chinese goods offer.

Data released this week from China supported that view. The Chinese government said that its trade surplus for June with the rest of the world jumped to a record $26.9 billion, almost double the surplus reported in June 2006.

The U.S. deficit with Canada, America's biggest trading partner, fell by 11.5 percent in May to $5.2 billion. The deficit with the European Union dropped by 2.5 percent to $8.8 billion.