Every Silver Lining Has a Cloud

By Barbara Rudolph

At first glance, last week's Government trade report looked like welcome economic news. The trade deficit suddenly narrowed to $9.7 billion in March, a 30% drop from February's $13.8 billion level and a far better performance than even the most hopeful economists had projected. After months of frustrating setbacks, the trade deficit was finally coming down sharply, and it appeared that the U.S. was making progress in solving one of its most pressing economic problems.

But economists and investors always seem to search for clouds in even the sunniest skies. They noted that exports in March rose 23%, to a monthly record of $29 billion, and that imports went up as well, by 3.5%, to $38.7 billion. Some economists would have preferred to see a more moderate rise in exports, combined with a reduction in imports. Reason: large increases in both categories may indicate that the economy is in danger of overheating. Already, factories are operating at an average of 82.7% of capacity, the highest level in eight years. In many industries, plants are reaching their productive limits, which has stirred fears of higher inflation and interest rates. Last week the Government reported that consumer prices for the month of April increased 0.4%. During the first four months of the year, prices rose at a moderate annual rate of 4.5%. But concern that inflation may be on the verge of accelerating helped cause last week's 2% drop in the Dow Jones industrial average.

The jump in exports will lessen the sense of urgency over passage of trade legislation this year. The bill approved by Congress is designed to curb the deficit by forcing the White House to take stronger action against unfair ; foreign trade practices. But President Reagan has promised to veto the measure largely because it contains a provision requiring companies to give workers 60 days' notice of plant closings and mass layoffs. It appears that Democrats do not have enough votes in the Senate to override the veto, especially after the trade-report figures.

The reduction of the deficit suggests that the 40% fall in the value of the dollar against major industrial currencies over the past three years, which has made U.S. exports less expensive in foreign countries, is at last having a substantial impact. Among the products selling particularly well in overseas markets: aircraft, office equipment and telecommunications gear. Says U.S. Trade Representative Clayton Yeutter: "The lower dollar has thrown open doors that were closed to American exporters for much of the decade." Says Robert Ortner, an Under Secretary for Economic Affairs at the Commerce Department: "This is a genuine export boom."

Meanwhile, imports continue to rise, even though the decline of the dollar has made foreign goods more costly in the U.S. One reason: the export surge has encouraged American industry to go on a binge of investment in new equipment, much of it imported. In 1982 foreigners filled 14% of U.S. capital- goods orders, excluding automotive equipment. For the first three months of this year, that share rose to 27.8%.

American demand for foreign consumer goods remains strong, however steep their price tags. At a meeting in Paris last week of the Organization for Economic Cooperation and Development, top European officials pointed to excessive consumption as the chief cause of the U.S. trade deficit. Nigel Lawson, Britain's Chancellor of the Exchequer, called for a "slowdown in the growth of U.S. domestic demand, which in these circumstances is rising uncomfortably fast."

As economists examined the fine print of the March trade report, they discovered yet another discouraging fact: the monthly deficit with Japan stayed steady at $4.5 billion. Since that represents nearly half the total U.S. deficit, even the most optimistic Administration official would have to admit that the trade imbalance is likely to remain a stubborn problem for years to come.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

CAPTION: NARROWING GAP

DESCRIPTION: United States imports, exports, trade deficit, April 1987-March 1988; color illustration of Uncle Sam looking over bow of ship.

With reporting by Gisela Bolte/Washington and Wayne Svoboda/New York