U.S. economy may not weak as first feared: Analysts

Ross Finley, Reuters, New York

A slight narrowing in the huge U.S. trade deficit in August suggests the U.S. economy wasn't as weak as feared this summer, but analysts cautioned this was not a sign of future economic health.

Most economists were expecting a contraction during the June- September period, with the closely watched Blue Chip survey of 44 U.S. economists taken after the Sept. 11 attacks forecasting a 0.5 percent decline in gross domestic product.

Now many Wall Street analysts said on Friday they would revise their GDP forecasts -- the trade data could result in a maximum of 0.5 percent upward revision, they said -- which would still leave expectations flat or negative.

That would mark the first interruption in the longest period of U.S. economic expansion, which has lasted more than a decade.

U.S. GDP grew by a paltry 0.3 percent, annualized, in the second quarter. That compares to a robust 5.7 percent during the same period in 2000.

International trade figures published Friday showed the trade gap in August narrowed to US$27.11 billion from a revised $29.17 billion in July.

That came in part from a mild rise in exports, up $0.9 billion to $84.5 billion during the month as exports to China hit a record $1.92 billion.

But imports fell for a fifth straight month as U.S. demand for foreign goods weakened.

"This report indicates the foreign sector provided some buffer for the economy against the deterioration in domestic demand and inventory behavior," said John Youngdahl, senior economist at Goldman Sachs, in a Friday note to clients.

"That will help to offset other data suggesting deeper weakness in U.S. spending and production," he said.

But while the trade deficit will continue to narrow as weakening U.S. demand thins the inflow of imported goods, economists said both imports and exports are likely to fall in the future -- a sign of broad economic weakness, not strength.

"As the trade deficit narrows, it will add to GDP," said Steven Wood, chief economist at FinancialOxygen in Walnut Creek, California. "But because both imports and exports are falling it is not a sign of economic health."

U.S. exports will most likely fall away in the months ahead as foreign demand for U.S. goods slows -- particularly if the strong dollar, which makes U.S.-made products more expensive relative to other countries, maintains its strength.

"It was certainly a good result in that exports were up, it shows there was demand abroad," said Kathy Bostjancic, economist at Merrill Lynch in Jersey City, New Jersey, shortly after August's trade deficit figures were released.

"But when you see the Ifo survey, and the ECB is reluctant to stimulate the economy, that's going to impact (U.S.) exports."