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Originally published March 18, 2009 at 6:32 AM | Page modified March 18, 2009 at 12:30 PM

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U.S. trade deficit drops sharply for second straight year

The deficit in the broadest measure of U.S. trade fell sharply in 2008 for the second consecutive year, due partly to a larger surplus in services trade.

AP Economics Writer

WASHINGTON —

The deficit in the broadest measure of U.S. trade fell sharply in 2008 for the second consecutive year, due partly to a larger surplus in services trade.

The Commerce Department reported Wednesday that the current account deficit, which includes investment flows and other transfers as well as trade, dropped 7.9 percent to $673.3 billion in 2008 from $731.2 billion in 2007.

Economists expect the improvement in the U.S. current account to continue this year, but mostly due to rapid falls in imports as the recession cuts into U.S. consumers' buying power. Exports are also falling as the global economy slows, eliminating what had been a crucial source of sales for U.S. manufacturers early last year.

The deficit fell to $132.8 billion in the final three months of last year from a revised $181.3 billion in the third quarter, the department said. That was the lowest since the fourth quarter of 2003 and below what analysts expected.

As a percentage of the economy, the fourth quarter deficit was 3.7 percent, the lowest since the figure was 3.4 percent in the fourth quarter of 2001.

The United States finances the deficit by borrowing from foreigners, so a smaller deficit reduces the need for such borrowing.

The current account deficit increased for five straight years before falling slightly in 2007. The deficit equalled 4.7 percent of the overall economy last year, down from 5.3 percent in 2007.

The surplus in services trade, which includes insurance and financial services, travel fees and royalty payments, increased to $139.7 billion last year from $119.1 billion in 2007.

The U.S. also saw a sharp increase in its surplus in international income, the Commerce Department said, as U.S. companies paid far less in interest and dividends to foreign investors last year than in 2007. The U.S. income surplus increased to $127.6 billion in 2008 from $81.7 billion the previous year.

Meanwhile, the deficit in goods trade fell to $174.1 billion in the fourth quarter from $216.3 billion in the July-September period, as a sharp drop in imports outweighed a decline in U.S. exports.

That trend is continuing so far this year. The Commerce Department said Friday that the trade imbalance dropped to $36 billion in January, a decline of 9.7 percent from December and the lowest level since October 2002.

The drop in exports is hurting many U.S. manufacturers.

Caterpillar Inc., a leading U.S. exporter, said Tuesday it would lay off 2,400 employees at five plants in Illinois, Indiana and Georgia. The company said in January that its earnings plunged 32 percent in the last three months of 2008 as global demand for its mining and construction machines plummeted.

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