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U.S. trade gap shrinks
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November 20, 2001: 12:28 p.m. ET
Drop of $8.4B is record for any month; leading indicators edge up.
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NEW YORK (CNN/Money) - The U.S. trade deficit narrowed more sharply in September than ever before in one month, the government said Tuesday, largely reflecting the impact of the Sept. 11 terror attacks.
But a closely watched index of future economic activity was better than expected in October, meaning the world's largest economy may be set to recover, though it's still in trouble in the near term.
The nation's trade gap shrank to $18.7 billion from $27.1 billion in August, the Commerce Department reported - the lowest since $18.4 billion in March 1999 and well below Wall Street forecasts of $26.0 billion.
The government said the $8.4 billion drop was the biggest monthly decline on record.
"That's a huge drop," Paula Stern, president of the Stern Group and former chairwoman of the U.S. International Trade Commission, told CNNfn's Before Hours program. "In September, what you had was in effect an embargo in the United States for about a week or so, where goods were not coming in or going out because of the attack."
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CNNfn's Lisa Leiter reports on the leading indicators.
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The drop in the deficit also was exaggerated by the unusual payment of $11 billion in claims by overseas insurers after the Sept. 11 attacks.
"The trade figures are distorted by the effects of foreign re-insurance on the World Trade Center. Nevertheless, international trade is contracting," said Steven Wood, economist with FinancialOxygen.
"The sharp slowing in domestic demand has dramatically reduced imports," Wood added. "Weakening economic activity in our major trading partners has significantly reduced the foreign demand for American-made products."
But the Conference Board reported its index of leading economic indicators, which points to how the economy will perform in future months, rose 0.3 percent to 109.4 after a 0.5 percent drop in September. Economists surveyed by Briefing.com expected the index to be unchanged.
"It looks nice, [and gives] a little confidence boost that we're coming back," said Conference Board senior economist Delos Smith. "But is it reality? It isn't. We have a sluggish economic system in a lot of trouble."
U.S. stocks were lower in midday trading, while U.S. Treasury bond prices fell.
Click here for CNNmoney.com's economic calendar
To keep the economy from falling into a recession, commonly defined as two consecutive quarters of contracting gross domestic product (GDP), the Federal Reserve has cut its target for short-term interest rates a record-tying 10 times this year.
Three of the cuts came after the Sept. 11 attacks, which essentially put the brakes on the U.S. economy for a few days. Most economists think that turned a long-lasting slowdown in the U.S. economy into a recession, and third-quarter GDP was negative, meaning we could be halfway there.
Exports fell to $77.3 billion from a revised $84.5 billion in August, while imports fell to about $96 billion from a revised $111.6 billion. Both imports and exports were the lowest since March 1999.
Tuesday's trade data will be included in the next revision of the Commerce Department's reading of third-quarter GDP, scheduled for release Nov. 30, and economists were divided about its impact.
"It suggests the drag on the economy from the trade deficit in the third quarter will not be as great and could help revise up third-quarter GDP a bit," said Gary Thayer, chief economist with A.G. Edwards & Sons.
But some analysts thought the data already were included by the government in its first estimate of GDP and would have little impact, while others thought the weakness in activity could take GDP lower.
"Relative to what was the first estimate of GDP, this data was a little worse and that's going to make the third-quarter GDP a little worse, to around negative 1.2 percent," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets.
The shrinking trade gap was skewed by an unusual jump in the surplus of services, to $17.22 billion from $6.97 billion in August. Most of this jump reflected the payments of overseas insurers in the wake of the terrorist attacks. A deficit in manufactured goods actually widened in September, to $35.92 billion from $34.07 billion in August.
Click here for more on the Fed and rates
Most economists expect the economy to rebound some time next year, and the data from the Conference Board, an economic research firm that also publishes closely watched monthly studies on consumer confidence, reinforces that view.
Its lagging and present-day indicators show the weakness that existed before and was worsened by the terrorist attacks. The lagging index fell 0.3 percent in October after falling 0.2 percent in September, while the coincident index fell 0.2 percent in September after being unchanged in September.
The leading indicators that rose in October were vendor performance - how quickly wholesalers ship goods to retailers - interest-rate spread, money supply, stock prices, manufacturers' new orders for capital and consumer goods, and the index of consumer expectations.
But that index of consumer expectations was actually the University of Michigan's index, which reportedly rose in November. The Conference Board's own index, on the other hand, has continued to fall.
"I'm glad the rest of the world thinks [Tuesday's data are] happy news, but I don't," the Conference Board's Smith said. "Two of the indicators - interest-rate spread and money supply - are controlled by the Fed. If we'd used our own [sentiment index], the total index would be down."
The fact that manufacturers' new orders rose is a ray of sunshine for the manufacturing sector, which has been in recession for more than a year and has cut hundreds of thousands of jobs.
The three leading indicators that dragged the total index down in October were rising average weekly claims for unemployment insurance, combined with a slowdown manufacturing hours and permits for construction of new homes.
These are bad news for the health of the overall economy, since swelling unemployment saps consumer confidence, and a slowdown in the housing market is pulling away one of the last pillars of strength in the economy.
Still, fourth-quarter GDP could get a boost from holiday shopping, especially if consumer confidence gets a boost from the receding threat of further terror attacks and the swift success of the war in Afghanistan. Consumer spending makes up two-thirds of total GDP.
"We're going into the Thanksgiving and Christmas season, and this is where the retailers, at least, are going to make it up," Paula Stern told Before Hours. "The GDP figures that are boosted by consumer spending remain to be seen."
In a separate report, the Conference Board said it expects holiday spending to be curbed this season, falling to $462 per household from $490 a year ago, based on its survey of about 5,000 homes.
"The sluggish economy, declining consumer confidence, widespread layoffs and the tragic events of Sept. 11 appear likely to hold down holiday spending as we head into the final five weeks of the year," said Lynn Franco, Director of The Conference Board's Consumer Research Center. "But retail outlets offering the price-conscious consumer a good buy may fare better than projected." 
- from staff and wire reports
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