Breathing A Bit Easier

The suspense in the world’s stock and currency exchanges last week was almost palpable. Share prices gyrated, and the value of the dollar fluctuated fitfully, but none of the financial markets moved with any conviction. Traders seemed practically paralyzed by the knowledge that on Friday the Commerce Department would release the U.S. trade statistics for November. There was good reason for their concern. Three months earlier a worse than expected trade-deficit figure helped send the stock market into a slide that culminated in the great crash of Oct. 19. And in mid-December the announcement of a sharp jump in the trade deficit sent the dollar tumbling.

No wonder that at 8:30 a.m. Washington time last Friday, virtually every money manager and trader was intently watching a TV, a computer terminal or a wire-service ticker. When the fateful figure at last flashed across the screens, it was another shocker — but this time a good one. The Government announced that the November deficit was $13.2 billion, a stunning 25% decline from October’s record $17.6 billion shortfall and the best monthly trade showing since the $13 billion gap in April. Exports surged 9% from October, to $23.8 billion, as imports fell 6%, to $37 billion. Inflation numbers, announced at about the same time, were equally encouraging. U.S. wholesale prices actually declined by .3% in December, largely because of decreasing energy costs. For all of 1987, wholesale-price inflation totaled a modest 2.2%.

The double charge of cheery news had a predictably explosive impact on currency exchanges and financial markets. The dollar jumped to nearly 131 Japanese yen, up sharply from about 126 yen the day before. The greenback also fetched 1.68 West German marks, vs. 1.63 the previous day. At the New York Stock Exchange, everyone who had been planning to buy stocks if the trade figure was good seemed determined to get in at the opening bell. The Dow Jones industrial average skyrocketed, beginning trade 55 points above Thursday’s close of 1916. But the surge ended almost as soon as it had begun, and the market settled into a day of seesaw trading as some investors decided to cash in their profits. The Dow finished at 1956.07, up 39.96 for the day and 44.76 for the week.

The relatively modest proportions of Friday’s stock rally may have reflected the realization that while the November trade figure was a welcome $ improvement, it hardly signaled an end to America’s stubborn deficit dilemma. Standing at $159 billion through the first eleven months of the year, the 1987 deficit has already surpassed the record $156.2 billion imbalance of 1986. As recently as 1981, the U.S. trade gap was only $34.6 billion.

President Reagan seems able to find encouragement in the trade figures no matter which way they are moving. After Friday’s news, Reagan said the rise in exports showed that “our competitive position in the world is steadily improving.” That was a bit at odds with a comment he had made four days earlier, when he called the deficit with other nations a “sign of strength” because “our growing economy enables us to buy their goods.” This rationalization provoked ridicule from Democratic critics. Congressman Richard Gephardt of Missouri, a champion of fair trade and a presidential candidate, labeled Reagan’s argument “mush.” Said he: “The trade deficit is an indication that we’re not winning our share of the world economy.” Rudolph Oswald, chief economist of the AFL-CIO, agreed. “Reagan must have been reading Alice in Wonderland rather than the U.S. trade figures. He’s got everything upside down.”

Concern about the trade deficit focused attention on last week’s visit to the White House by Japan’s new Prime Minister, Noboru Takeshita. Last year Japan accounted for $60 billion of the U.S. trade gap. The two leaders agreed that reducing the trade imbalance was a “top priority,” but took only a few modest steps in that direction. Takeshita made new proposals to give American construction companies greater access to Japanese public works projects. He also promised that his government would strive to hold down interest rates, which could help stimulate Japan’s economy and boost demand for imports from the U.S. Both men said that the dollar’s three-year fall against the yen had gone far enough.

Whether or not the dollar goes lower, its 50% decline against major currencies since early 1985 has started to work wonders for American exporters, who have watched their products become progressively cheaper to foreign buyers. U.S. exports were an estimated $251 billion last year, up nearly 15% from 1985, and most economists expect the rise to continue. Jason Benderley, a senior economist at the Goldman, Sachs investment firm, predicts that if the dollar stays at its current level, overseas shipments could grow by as much as 15% a year through 1991. If imports level off or decline, the trade deficit could finally start to shrink steadily.

An increase in exports may be crucial to keeping the U.S. economy out of a recession in 1988. After five years of economic expansion, American consumers may begin to slow their spending, especially in the wake of October’s stock crash. But foreign demand for U.S. goods could keep American factories humming and boost capital spending as companies strive to increase their production. Many economists think the U.S. is on the verge of becoming the sort of export- driven economy that West Germany and Japan have been over the past quarter- century.

While traditionally strong exporters such as Boeing, IBM and General Electric are leading the way, the list of U.S. companies pushing hard for overseas sales is growing rapidly. Steelmaker USX has revived its international division, dormant since 1984. Chrysler, which has not had much of a foreign presence in the past, expects to sell $700 million worth of cars in Europe this year, double the 1987 level. Exports are also exploding for Apple Computer, Zenith Electronics, Tandy, and other manufacturers of personal computers. Says Jim LeMunyon, a spokesman for the American Electronics Association: “With the dollar down, U.S. electronics manufacturers will hit the world markets with a great advantage.”

But the weak dollar is not the only factor in the return of America’s export prowess. Through cost cutting, work-force reductions and increasing use of technology, U.S. companies are becoming leaner and more efficient. Between 1986 and 1987, U.S. manufacturing productivity — output per man-hour worked — rose by an average 3.75%, compared with 3.5% in Japan and 2.2% in West Germany. At the same time, U.S. labor costs have fallen by 3%, while they have remained about the same in Japan and risen by 6.5% in Germany. In at least one basic industry, the U.S. has actually become the low-cost producer among major countries: it can turn out a ton of steel for $470 — $55 less than it costs in Japan.

There are limits, however, to how rapidly the export drive can proceed. Some industries are already running almost flat out. Paper plants, for example, are operating at 95% of capacity, textile mills at 94%. Says Robert Gay, a senior economist at the Morgan Stanley investment firm: “Any feasible expansion of U.S. exports, by itself, cannot eliminate the trade imbalance, at least not within the next several years.”

The problem is that imports are still running more than 50% ahead of exports. In some cases, as the prices of imports rise because of the weak dollar, consumers can be expected to switch to American-made products. California vintners are picking up sales at the expense of French and Italian wines. But many big spenders still prefer the mystique of imported products, from a Mercedes-Benz roadster to an Hermes purse. Some popular items, like the videocassette recorder, are not made in the U.S. at all.

To many economists, the fundamental story behind the trade deficit is that America has been living beyond its means. Says Goldman, Sachs’ Benderley: “For six years, while our trade partners were tightening their belts, we created a consumption machine through a combination of tax cuts and increased spending.” The best remedy may be to keep reducing the U.S. budget deficit and to slow down — but not stall — the economy.

The consequences of America’s deficit spending grow more serious by the day. Foreigners are using the dollars they accumulate from selling goods in the U.S. to buy American stocks, bonds, real estate and corporations. In the July-September quarter of 1987, foreigners earned some $260 million more on these investments than Americans received from their holdings abroad. It was the first time the U.S. had run this kind of investment deficit in more than 50 years. What it means is that the U.S. will eventually have to run a trade surplus just to pay the interest it owes to other nations. So far, foreigners have loaned the U.S. the money to balance its accounts, but that cannot go on indefinitely. As a result, the U.S. faces a difficult choice: bring its consumption down now or risk a hard landing later on.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME CHART BY CYNTHIA DAVIS; PHOTOS, TOP: ROBIN MOYER, THOMAS HARTWELL, SUAU — BLACK STAR, CHARLESWORTH — J.B. PICTURES; BOTTOM: GEPPERT — WEST STOCK, GEORGE STEINMETZ, SHERMAN — BRUCE COLEMAN, EDWARD — GAMMA/ LIAISON

CAPTION: U.S. merchandise trade in billions of dollars

DESCRIPTION: United States imports and exports, 1982-1987. Color: Eight photos: Worker and textile machinery; tanker; woman working with television monitor; new pickup trucks and autos; machine loading grain; industrial interior; pills and capsules; airplane under construction.