Current account gap shrinks in 4th quarter

By Doug Palmer

WASHINGTON (Reuters) - The U.S. current account deficit shrank in the fourth quarter of 2006 to its smallest in more than a year as lower oil prices took a bite out of imports and U.S. exports continued to rise, a Commerce Department report showed on Wednesday.

The quarterly shortfall totaled $195.8 billion, below a midpoint estimate of $204 billion made by Wall Street analysts before the report. It was also the smallest since the third quarter of 2005, when it was $183.4 billion.

But the gap still set an annual record in 2006 at $856.7 billion, up more than 8 percent from 2005. It also set a record as a percentage of the overall U.S. economy, or gross domestic product, at 6.5 percent, up from 6.4 percent in 2005.

The current account is the broadest measure of U.S. trade with the rest of the world. It includes trade in goods, services, and capital and financial flows, such as foreign purchases of U.S. Treasury bonds to help fund the U.S. government's budget deficit.

Sen. Charles Schumer, a New York Democrat who chairs the congressional Joint Economic Committee, blamed Bush administration economic and trade policies for the record shortfall, which he said threatened the U.S. standard of living.

"Our economic security should not be in the hands of China or Saudi Arabia or any other entity because this administration can't control government spending and because they haven't effectively negotiated trade deals," Schumer said.

However, Dan Griswold, director of the Cato Institute's trade policy center, said the current account gap reflected strong U.S. consumer and business demand and the active interest of foreigners in investing in the United States.

"If the expanding current account is a drag on growth, somebody forgot to tell the U.S. economy," Griswold said. "Growing levels of trade and foreign investment have boosted U.S. growth, job creation and rising real wages."

The fourth-quarter gap fell to 5.8 percent of U.S. gross domestic product, from 6.9 percent in the third quarter and a record 7 percent in the fourth quarter of 2005.

"We believe the current account has peaked" and will decline to $809 billion in 2007, said Nigel Gault, U.S. economist for Global Insight. "The trends are becoming more favorable. Robust export growth, and some cooling in import growth, should keep the deficit down this year."

U.S. goods imports in the fourth quarter decreased to $464.6 billion, from $480.2 billion in the third quarter, driven by a large drop in the value of oil as prices tumbled from highs earlier in the year.

U.S. goods exports increased to $266.6 billion, from $261.3 billion. Exports of civilian aircraft and other capital goods led the increase, followed by consumer goods.

U.S. investors made net purchases of a record $115.7 billion of foreign securities in the fourth quarter, up from $54.4 billion in the third quarter.

The news initially helped boost the dollar against the yen on Wednesday, but the greenback later gave back those gains as concerns about a crisis in the U.S. subprime mortgage market pushed stocks lower.

Meanwhile, U.S. Treasury prices edged higher as stocks extended their sharp decline.