Trade gap narrows, but consumers wary

WASHINGTON (Reuters) - The U.S. trade deficit narrowed unexpectedly in February in a positive sign for the economy, but rising gasoline prices and troubles in the housing market knocked consumer sentiment to its lowest in eight months this month, according to reports on Friday.

The February trade gap fell to $58.4 billion, as crude oil imports fell sharply to the smallest in four years and average imported oil prices were the lowest since December 2005, a government report showed.

The Reuters/University of Michigan Surveys of Consumers said the preliminary April reading of its consumer sentiment index slid to 85.3 from 88.4 in March.

The April result was the lowest since 82.0 in August 2006 and marked the third straight fall in the index.

"Consumer confidence declined in early April due to rising gas prices and falling home prices," a statement accompanying the Reuters/University of Michigan data said.

"Surprisingly, for the second month, the entire loss was among upper-income households."

The sentiment survey also showed its one-year inflation index popping to 3.3 percent in April after holding steady for three months at 3.0 percent.

"This is one of the cyclical difficulties we are stuck in. Growth is not where we want (it) to be and we continue to have inflation problems," said Robert Brusca, chief economist at Fact and Opinion Economics in New York.

The rise in inflation expectations pushed down Treasury bond prices, which earlier had risen on a tame reading on producer prices for March, once volatile food and energy prices were excluded. Stocks finished higher, with the Dow Jones industrial average up 0.5 percent, while the dollar fell to two-year lows against the euro on Friday.

Rising energy prices boosted overall producer prices in March by a greater-than-expected 1 percent, a Labor Department report showed. But without food and energy, prices on the producer level were flat that month.

Overall producer prices rose 3.2 percent from a year ago, the biggest climb since a 3.8 percent 12-month gain to August 2006.

Core producer prices rose 1.7 percent from the same period 12 months ago, slowing from a 1.8 percent year-over-year rise in February.

CRUDE OIL BILL FALLS

The U.S. trade deficit declined for the second consecutive month after hitting a record $765.3 billion for 2006.

In an interview, U.S. Commerce Secretary Carlos Gutierrez said the Bush administration's plan of reducing the trade deficit through higher exports was bearing some fruit.

"Exports are up 10 percent year-to-date and imports are up 3 percent. The trend continues to be very positive," Gutierrez said. "Our strategy continues to be to grow exports and not reduce the deficit by limiting imports."

But Gutierrez stopped short of predicting the trade deficit would finish 2007 lower than last year. "Energy prices obviously are an important factor," he said.

Democrats said the trade deficit remained too large despite the slight monthly improvement and promised change now that they control the House of Representatives and Senate.

"The House Democrats' New Trade Policy for America will improve enforcement of U.S. trade laws, increase U.S. enforcement efforts at the WTO, and press China to end its currency manipulation, intellectual property rights violations, and illegal subsidies. We will also continue to press on the undervalued yen," said Rep. Sander Levin, a Michigan Democrat.

The petroleum trade deficit in February was the smallest since June 2005, as crude oil import volume fell 21 percent to its lowest since February 2003 and prices dipped to $50.71 per barrel, from $52.23 in January.

Since then, low U.S. gasoline inventories and international tensions over Iran have pushed U.S. oil futures prices back above $63 per barrel.

Overall U.S. imports fell 1.7 percent in February to $182.4 billion, led by the drop in petroleum and aided by other categories. However, imports of foods, feeds and beverages rose slightly to a record during the month.

Imports from China fell 10 percent to $23.1 billion, the lowest since May 2006. The closely watched trade gap with that country narrowed 13.3 percent, as U.S. exports to China grew 6.1 percent to $4.6 billion.

Overall U.S. exports retreated 2.2 percent to $124.0 billion after rising steadily in the six prior months. Exports of U.S. consumer goods slipped from the record set in January, but still were the second-highest ever.