Don't expect trade gap to shrink
By William Sluis
Chicago Tribune
Although Americans studiously avoid worrying about their country's deep and worsening trade deficit, its effect on the dollar offers a clear-cut negative:
As the currency weakens, it makes foreign goods more expensive, especially commodities including petroleum, coffee and basic metals. That awakens fears of inflation.
Such concerns intensified last week as the widely followed Reuters Commodity Research Bureau index of futures contracts soared to the highest level in more than 24 years. Oil surged above $55 a barrel, coming close to a record high.
A fresh look at the trade chasm and its effect on the greenback occurs Friday, with a report on the shortfall for January. Economist Scott Anderson expects the deficit to recede slightly to $56 billion from $56.4 billion in December.
"Imports dropped a bit after the holidays, while exports, which were somewhat weak at the end of last year, rebounded," said Anderson, of Wells Fargo & Co. in Minneapolis.
Looking at the rest of this year, however, he sees more hurdles on the trade front.
For one thing, the fourth-quarter deficit, including goods and services, known as the current account, likely grew to a worrisome 6.2 percent of gross domestic product, he said.
"We are unlikely to see meaningful improvement in the trade situation before next year, and that could mean the dollar will depreciate, on a trade-weighted basis, by another 5 percent," Anderson said. "There will be additional worries about the dollar's fate in the months ahead."
The Federal Reserve, which has raised its key short-term interest rate a half-dozen times since June, is widely expected to do so again when it meets in a little more than two weeks. On Wednesday, the central bank offers its so-called beige book report, a region-by-region look at the economy, ahead of its policy-setting session March 22.
Chicago economist William Hummer says that "it's just about a sure thing that the central bankers will raise their short-term rate by another quarter-point, to 2.75 percent."
The Fed's description of the economy this week "will be quite upbeat, pointing to buoyant, well-balanced expansion, with brisk consumer spending and inflation remaining remarkably low, at less than 2 percent," said Hummer, of Wayne Hummer Investments.
For the rest of 2005, the central bank is expecting economic growth to hold near its current rate, between 3.5 percent and 4 percent, he said.
The central bank will continue pushing rates higher for at least two more meetings and by early May will advance the short-term target to a flat 3 percent, according to Hummer. Don't be surprised, he adds, if the rate hits 3.5 percent this summer.
Rising oil prices have hurt the stock market. Hardest hit have been computer stocks, as the Nasdaq composite index has tumbled nearly 7 percent since the beginning of the year.
Despite the obvious shivers on Wall Street, any effect from energy prices will likely be delayed, says economist A. Gary Shilling.
"The stock market continues to ignore energy prices, even though high fuel costs have the same effect as a stealth tax increase," said Shilling, who heads an investment firm in Springfield, N.J.
The negative influence of a soaring tab for energy would grow more severe if the economy were to stumble, he said.
"For now, high oil prices seem to be slowing economic growth by less than 1 percent," Shilling said.
"The danger will come if prices don't ease off before autumn. If they are still very high six months from now, they will prove to be a real drag."
