Trade Gap Falls 25%; Dollar Up : Exports Surge; Stock, Bond Prices Rally

WASHINGTON — The nation’s chronic deficit in merchandise trade fell by an unexpectedly large margin in November to $13.2 billion, an improvement of 25% from October’s record $17.6-billion shortfall, the Commerce Department reported Friday.

The November trade report had been anxiously awaited by financial and currency markets worldwide. The impressive improvement, marked by a $2-billion surge in U.S. exports and a sharp $2.4-billion drop in imports, was far better than the $15-billion deficit figure that had been widely projected.

Interest Rates Fall

After the figures were announced, the dollar soared against most currencies, key interest rates fell and bonds and stock prices rallied. On Wall Street, stocks gained 39.96 points on the Dow Jones index. And, in yet another sign of economic health, wholesale prices dropped by 0.3% last month, an indication that inflation is remaining under control.

November trade balances are almost always at least $1 billion better than those of October, but Friday’s report was too strong to be dismissed as a seasonal variation. Economists, with varying degrees of caution, greeted it as the best signal yet that the Administration’s two-year campaign to bring down the dollar from its 1985 peak was finally paying off.

Particularly impressive, analysts noted, was the strong $1.8-billion surge in exports of manufactured goods, a 12.5% improvement over October, and a $1.5 billion decline in manufactured imports, a 5% drop. In all, exports increased more than 9%, while imports sagged by 6%.

Moreover, the improvement extended to all major trading partners, virtually all of whom have the upper hand in trade with the United States. The huge deficit with Japan narrowed by nearly 19%, to $4.8 billion from $5.9 billion, and declines of varying magnitude were registered in the deficits with Western Europe ($2.4 billion, from $3 billion) Taiwan and South Korea (jointly $2 billion, from $2.8 billion) and the oil-exporting countries ($1.1 billion, from $1.7 billion). Petroleum imports, higher in recent months, fell $350 million.

The Administration, starved for good news on the trade front for months, reacted with gleeful surprise. President Reagan, on his way to Bethesda Naval Hospital for medical tests, declared that “the fundamentals in the United States economy remain sound” and said that the surge in exports shows that “our competitive position in the world is steadily improving.”

Sustained Growth Cited

He added: “This news has had a positive impact on the financial markets around the world, but we should not pay undue attention to any one month’s trade numbers. The real significance is that, over the past 61 months, the trend for the American economy has been sustained growth with lower inflation, and today’s signs indicate that it will continue well into the future.”

Commerce Secretary C. William Verity cited the steady increase in exports--visible for more than a year in his department’s quarterly reports on the economy’s real growth in uninflated dollars--as a sign that the nation’s recent economic troubles are on the mend.

However, Verity cautioned that, even with November’s improvement, the trade deficit in goods is heading for a record $170 billion this year. “We have a long way to go,” he said, urging manufacturers to “take advantage of the current favorable currency exchange rate” and aggressively expand exports.

Private economists hailed the report as a welcome surprise, but many warned that the improvement would have to be sustained for years to compensate for the huge imbalances that have drawn foreign capital into the U.S. economy and made the nation a global net debtor.

Prediction Supported

Chief economist Jerry J. Jasinowski of the National Assn. of Manufacturers, who a day earlier had said that manufacturing industries were on the threshold of a decade-long expansion that would protect the economy from recession this year and lead to faster growth later on, called the report “an A-plus number” that supported his prediction.

“The best news is the $3.3-billion improvement in the deficit in manufactured goods, which in turn accounts for 80% of the overall deficit,” Jasinowski said. The manufactured goods deficit fell to $12.2 billion from a record $15.5 billion.

“The manufacturing improvement was across the board,” he added, “with the biggest gains in exports of aircraft, autos, chemicals, computers and office equipment and most categories of machinery”--many of the higher-technology goods in which U.S. industry was once dominant.

Jasinowski noted also that the list of import declines covered several areas in which foreigners, primarily Japan, were mounting major challenges, such as computers, telecommunications equipment and scientific instruments.

Significantly, one of the biggest declines was in foreign clothing and shoes. “That means a lot of pre-Christmas inventory speculation by importers hoping to get ahead of the next decline of the dollar with early orders is now over with,” Jasinowski said.

‘Finally Made the Turn’

Jay Goldinger, an international investment specialist with Cantor, Fitzgerald & Co. of Los Angeles, predicted that “we have finally made the turn” in the trade deficit and declared Treasury Secretary James A. Baker III vindicated in his policy of lowering the value of the dollar.

“Remember when (former Federal Reserve Board Chairman Paul A.) Volcker was criticized for killing the patient with his cure by ratcheting up interest rates to defeat inflation? It may turn out the same way with Baker’s dollar policy,” said Goldinger, who has been an acerbic critic of what he called the Administration’s “do-nothing” dollar and trade policies.

Mickey Levy, of First Fidelity of Philadelphia, verged on the ecstatic. “Next month’s trade number will be even better,” he predicted, as a stabilized dollar and lower interest rates strengthen the overall economy.

Added Bruce Steinberg, an economist at Merrill Lynch, of New York: “The trade report could hardly have been better. The best part was that exports rose sharply. We are having an export boom which is revitalizing the manufacturing sector.”

Imports Still High

He cautioned, however, that, in his view, so far “there is no evidence of a fundamental turn on imports.” November’s imports remained $2 billion higher than the monthly average from January through October, while the month’s export surge was $3.4 billion higher than the monthly average.

To David Wyss of Data Resources Inc. of Lexington, Mass., November’s “improvement in (the) trade deficit is only from horrendous to bad.” And he warned that the economy still faces two risks:

“First, the consumer might get scared if there is another stock market drop and he stops buying, and second, if Congress does something stupid, like passing (a protectionist) trade bill, which would send the dollar down like a rock. If that happens, foreign investors would want to get their money out of the U.S. as fast as possible, and the other central banks at that point would probably just say it’s our problem.”

THE TRADE DEFICIT AND THE FINANCIAL MARKETS

Deficit Daily Dow Daily dollar (billions) change %change Aug. 14, 1987 $15.7 -6.06 -1.3% Sept. 11, 1987 16.5 +32.69 +1.0 Oct. 14, 1987 15.7 -95.46 -1.1 Nov. 12, 1987 14.1 +61.01 +0.6 Dec. 10, 1987 17.6 -47.08 -2.4 Jan. 15, 1988 13.2 +39.96

Changes are in the Dow Jones Industrial Average and in the dollar’s value against the Japanese yen. SOURCES: Commerce Department, Nomura Securities