WASHINGTON: The US' trade deficit narrowed unexpectedly in November, while wholesale prices, outside of food and energy, posted a surprise drop last month, government reports indicated last Wednesday.

The trade gap shrank to US$38 billion, from US$41.60 billion in October, as civilian aircraft sales pushed exports to their highest level in three years, the Commerce Department said.

It was the smallest trade gap in 13 months.

In a separate report, the Labour Department said the Producer Price Index (PPI), which measures prices paid to farms, factories and refineries, rose 0.3 per cent last month after a 0.3-per-cent drop in November.

But stripping out volatile food and energy prices, the index fell 0.1 per cent for the second straight month. That indicated inflationary pressure is under wraps.

Analysts said the trade gap, which came in well below the US$42 billion markets had been expecting, implied a stronger fourth-quarter economic performance than had been estimated.

Some said the economy, which rocketed at a near 20-year best rate of 8.2 per cent in the third quarter, might have expanded at a rapid 5-per-cent annual clip at year's end.

As for wholesale prices, economists had looked for a 0.2-per-cent rise overall, but the drop in the so-called core rate came as a surprise.

Stock prices gained and the dollar, which had reached record lows against the euro earlier in the week, strengthened on the trade report.

Prices for US Treasuries initially ticked higher on the view inflation would remain well contained, but later slipped.

"The dip by the core PPI brings attention to how inflation is not an issue in the credit market, and it's the least of the Federal Reserve's worries," said John Lonski, chief economist with Moody's Investors Service in New York.

The Fed, which has held overnight interest rates at a 45-year low of 1 per cent since June, has said low inflation and lots of slack in the economy mean rates could likely stay low for a "considerable period."

Exports rising

Exports rose 2.9 per cent in November, while imports retreated slightly from October's record high.

The rise in exports was led by a US$1.2-billion jump in civilian aircraft shipments. Exports of other capital goods, such as industrial and aircraft engines, also showed healthy gains.

US exports have risen steadily over the past year, aided by the weaker dollar.

"It's an across-the-board improvement in the US trade gap," said Patrick Fearon, an economist with A.G. Edwards & Sons in St. Louis.

"The US had a smaller trade deficit, with every region, including China. Perhaps that is in part reflecting the dollar's decline against the euro."

Numerous European policy-makers have expressed concern that the dollar's drop, which has come mostly against the euro, could snuff out an export-led recovery in Europe.

But officials in Washington have voiced little concern about the dollar's fall.

"Inflation, the typical symptom of a weak currency, appears quiescent," Fed Chairman Alan Greenspan said last Tuesday.

Despite the unexpected narrowing in November, cumulative figures indicated the trade deficit had set an annual record.

The gap totalled US$446.8 billion for the first 11 months of 2003, surpassing the record of US$418 billion in 2002.

The burgeoning US trade deficit has become a political issue, with Democrats tying the loss of US manufacturing jobs to rising imports.

Petrol prices rise

Energy prices climbed 1.8 per cent last month, their biggest gain since June, as the cost of petrol jumped 5.1 per cent.

Food prices, which had fallen 0.3 per cent in November, gained 0.2 per cent last month as the cost of vegetables spiked 20.7 per cent.

That gain, and a sharp rise in the price of fruit, more than offset plunging beef, veal and pork prices.

For the year as a whole, producer prices rose 4 per cent - the biggest gain for any calendar year since 1990. But excluding food and energy costs, they rose a mild 1 per cent.

The report indicated price pressures building further back in the production pipeline, although those gains have yet to spill over to finished wholesale goods or consumer prices.

Some economists have said sharp increases in commodity prices are indicators of inflation.

But in a speech last week, Fed Governor Ben Bernanke said those concerns were misplaced.

"Rising commodity prices are a better signal of strengthening economic activity than of inflation at the consumer level," he said.

Agencies via Xinhua

(Business Weekly 01/20/2004 page2)