US trade deficit hits record $66bn

Soaring oil prices and a fresh surge in imports from China drove the US trade deficit to an unprecedented $66.1bn (£37.7bn) in September, shattering the previous monthly record of $60.4bn set only last February.

The figures were far worse than expected on Wall Street and were greeted with dismay by financial analysts. "We knew there were going to be hurricane-related distortions in the September data. But this really exceeded our worst fears," Michael Woolfolk, at the Bank of New York, said.

According to the Commerce Department yesterday, total imports rose 2.4 per cent to $171.3bn, while exports in September declined 2.6 per cent to $105.2bn. The bilateral deficit with China, meanwhile, reached a record $20.1bn, as Chinese exports to the US rose to their highest level of $23.3bn.

A major contributor to the deterioration was the jump in the cost of oil, to an average of more than $57 a barrel during September, after Hurricane Katrina blasted into the Gulf Coast, where much of US production and refining capacity is located.

But oil was far from the only culprit. Imports of manufactured goods rose, while US exports were hit by a strike at Boeing, slashing deliveries of commercial jetliners by almost two-thirds. There is almost certainly more of the same to come.

Although Washington and Beijing agreed a deal this week that would curb China's textile exports in the US for the next three years, the macroeconomic dynamics are moving against the US. "With the dollar strengthening, the deficits will grow in the months ahead," Peter Morici, professor of business at the University of Maryland, said. An overvalued dollar, he warned, was pushing up imports of cheap manufactured goods and handicapping US exports of high-end goods and services.

The worsening trade picture is likely to lead to renewed demands that China conduct a substantial revaluation of its currency. But it also confronts US monetary policymakers with a dilemma. The Fed has already pushed up short-term interest rates to 4 per cent, close to what analysts believe is the central bank's target. But the deficit may make further increases inevitable, which would stall domestic growth. The US trade deficit is running at an annual rate of almost $800bn, more than 6 per cent of GDP. The current account shortfall is expected to be even higher.