US trade gap, volatile markets a challenge for Trump

WASHINGTON: The US trade gap surged to its highest level in nearly a decade during President Donald Trump's first year in office -- more unwelcome economic news after Wall Street suffered historic losses, and setting up a test of confidence for his administration.

Government data released Tuesday showed the trade deficit increased due to record imports, which is partly a sign of a healthy economy, as well as rising oil prices.

But the disappointing report was released a day after a record drop in US stocks, which then spread to markets worldwide.

The news is a challenge for an administration that has taken almost immediate credit for every new sign of economic health, even those already in train during President Barack Obama's administration.

After suffering a record 1,175-point drop on Monday, US stocks were again being whipsawed in highly volatile trading, with the major indices opening sharply lower, recovering, and then falling back into negative territory.

Treasury Secretary Steven Mnuchin projected calm and said officials had an eye on the markets.

"We're monitoring the stock markets. They're functioning very well," he said in testimony in Congress. "I think you've seen a normal market correction, although large."

Mnuchin said despite the recent declines the administration can take credit for double-digit increases since Trump's election in 2016, given its focus on policies to improve the economy's long-term performance.

"The fundamentals are quite strong."

Analysts, however, said the broadening trade gap could cause downward revisions to GDP in the final quarter of 2017, taking the US even further from Trump's goal of three-percent annual growth.

The latest economic data look particularly bad for Trump who has made reducing the trade deficit a signature issue, saying countries unfairly take advantage of the United States, a position economists have criticized.

He also has ratcheted up protectionist rhetoric and  threatened to upend the prevailing international trade policies by canceling free trade pacts, including the North American Free Trade Agreement (NAFTA).

His administration has used aggressive retaliatory measures against trading partners like China to try to bring down the deficit, but the figures released Tuesday showed the annual trade deficit rose 12 percent from 2016 to $566 billion, its highest level since 2008 and the largest increase in seven years.

- 'Horrible,' but will it continue? -

Rising crude imports and a ballooning goods deficit with China, which hit its highest level on record at $375.2 billion, helped expand the trade gap, the Commerce Department reported.

The deficit also grew in the final month of the year, adding 5.3 percent to reach $53.1 billion in December, the highest since October 2008, and overshooting an analyst forecast by $800 million.

Imports rose far faster than exports, adding 6.7 percent to reach $2.9 trillion, the highest level ever. With crude oil prices recovering in the latter part of the year, imports rose 30.6 percent, while imported industrial supplies gained 14.5 percent.

"Horrible, but this rate of deterioration won't continue," Ian Shepherdson of Pantheon Macroeconomics said, noting that export growth should catch up.

RDQ Economics said in a client note the trade gap data is a sign of strong demand, which could favor an increase interest rates by the Federal Reserve -- the very prospect that set Wall Street's nerves on edge.

"We have made the point that when an economy is at full employment, an acceleration in demand tends to be accompanied by a pickup in import growth and a wider trade deficit," the note said.

Within the numbers, were signs of robust cross-border commercial activity in 2017. The US posted all-time record goods exports to 29 countries, with $243 billion exported to Mexico, $130 billion to China and $56.3 billion to the United Kingdom.

December was also the highest month on record for US goods exports to China at $13.7 billion and to Japan, at $6.4 billion.