US trade gap unexpectedly shrinks

WASHINGTON - The US trade deficit narrowed unexpectedly in May to US$55.3 billion ($81.56 billion) as exports set another new record and a short-lived drop in oil prices kept imports from reaching a new high, a government report showed.

The smaller-than-expected trade gap suggested stronger US economic growth in the second quarter than previously forecast and was likely to keep the Federal Reserve on a path of steadily rising interest rates, analysts said.

"This will mark up our Q2 growth number a bit, perhaps towards 3.4 per cent and 3.5 per cent," said Mark Zandi, chief economist with Economy.Com in West Chester, Pennsylvania.

"I think the Fed will look at this through the prism of growth. It argues that the Fed will continue to tighten policy with consumers continuing to spend aggressively and businesses investing aggressively," Zandi said.

The monthly trade gap narrowed about 2.7 per cent from April according to the Commerce Department report, defying the median estimate of analysts surveyed before the report who expected it to remain mostly unchanged at about US$57.0 billion.

The deficit was still within sight of the US$60.1 billion record set in February, which some analysts expect will be broken in coming months, and it is on track to break last year's record of US$617.6 billion. But the unexpected narrowing in May helped boost the value of the dollar in early trading.

The greenback rallied after the trade data eased concerns about US external financing problems. US Treasury debt prices receded after trade deficit data.

The trade shortfall with China, a hot-button issue in the US Congress, swelled 7.1 per cent in May to US$15.8 billion. That was offset by narrower trade gaps with Japan, Canada, Britain and France.

- REUTERS