* Trade deficit widens to $42.2 billion in October
* Exports post biggest drop in nearly four years
* Imports lowest in 1-1/2 years, underscores weak demand
* Wholesale inventories rise as sales tumble
By Lucia Mutikani
WASHINGTON, Dec 11 The U.S. trade deficit
widened in October as exports suffered the biggest drop in
nearly four years, indicating slowing global demand was spilling
over into the already struggling U.S. economy.
The Commerce Department said on Tuesday the trade gap
increased 4.9 percent to $42.2 billion. In a sign of weak
domestic demand, imports hit the lowest level in 1-1/2 years.
"The report tells a tale of weakening economic growth
momentum both domestically and globally," said Millan Mulraine,
a senior economist at TD Securities in New York.
Economists, who had expected the trade deficit to widen to
$42.6 billion in October, said superstorm Sandy could have
disrupted trade flows. The storm, which struck the East Coast in
late October, temporarily shut ports in New York and New Jersey.
However, the Commerce Department did not indicate that Sandy
was a factor. The wider trade gap in October reflected a 3.6
percent fall in exports of goods and services to $180.5 billion.
That was the biggest percentage drop in exports since January
Exports have been one of the pillars supporting the economy
since the 2007-09 recession ended. The pull=back in October's
export growth was telegraphed by weak manufacturing surveys and
reflects slowing global demand.
Imports of goods and services fell 2.1 percent to $222.8
billion in October, the lowest since April 2011. Economists said
the decline in imports was hardly surprising given a weakening
in consumer demand in recent months.
Fears that tighter fiscal policy, set to kick in early next
year, could push the economy back into recession have sapped
domestic demand and made businesses cut back on spending.
Trade was a modest boost to the third quarter's 2.7 percent
annual growth pace. Revisions to September's data showed a
narrower trade gap than previously reported and suggest the
contribution from trade was probably slightly bigger.
NEUTRAL GROWTH IMPACT FROM TRADE
In October, the inflation-adjusted trade deficit narrowed to
$46.2 billion from $46.6 billion in September.
While that led some economists to raise their meager fourth
quarter gross domestic product estimates, others cautioned the
bar was very high for a meaningful contribution from trade
because of the export plunge in October.
In addition, a strike by West Coast dock workers in late
November and early December likely reduced trade last month.
"Looking through all these distortions, trade is going to be
neutral on growth," said Ryan Sweet, a senior economist at
Moody's Analytics in West Chester, Pennsylvania.
Stocks on Wall Street ended higher, with the Standard &
Poor's 500 index closing at its best level since the Nov.
6 election. Prices for U.S. government debt fell,
while the dollar weakened across the board.
The three-month moving average of the trade deficit, which
irons out month-to-month volatility, widened modestly to $41.7
billion from $41.5 billion in the three months to September.
WHOLESALE INVENTORIES UP, SALES DOWN
Weak domestic demand was also underscored by a 0.6 percent
rise in wholesale inventories in October, which came as sales
fell for the first time in three months, a second Commerce
Department report showed.
That pushed the inventories/sales ratio, a measure of how
long it would take wholesalers to clear their warehouses, to a
three-year high. Inventories accounted for more than a quarter
of the economy's annual 2.7 percent growth pace in the third
October's restocking at wholesalers suggested the hit to GDP
growth from inventories this quarter would probably not be as
big as initially feared, economists said.
"We got a big inventory build-up in the third quarter and
some of that was unwanted. Businesses will probably be content
to draw down their inventories to meet demand," said Sweet.
"We are seeing the drivers of growth shifting away from
business investment, inventories and trade to a more
consumer-led recovery, but they won't be able to really drive
growth over the next few months because of concerns about the
A third report showed confidence among small business owners
dived in November and economists pinned that on the fears of
deep government spending cuts and higher taxes which could drain
about $600 billion from the economy early next year.
The National Federation of Independent Business said on
Tuesday its optimism index plummeted 5.6 points to 87.5 last
month, the weakest reading since March 2010.
While U.S. exports to the 27-member European Union rose 1.4
percent in October, there were substantial declines in goods
shipped to France, Germany, Italy and the United Kingdom.
Exports to the EU in the first 10 months of 2012 were down 0.7
percent compared to the same period in 2011.
However, the Commerce Department only reports goods trade
balances with individual countries and regions on a not
seasonally adjusted basis.
U.S. exports to Latin America also fell in October, and
shipments to Japan were down 8 percent.
Although exports to China, which have been growing more
slowly than in recent years, surged 23.1 percent in October,
imports rose to a record. That pushed the contentious U.S. trade
deficit with China to a record $29.5 billion.