08/09/2012 08:55 EDT | Updated 10/09/2012 05:12 EDT

Cheaper oil pushes US trade deficit to lowest level since December 2010

WASHINGTON - The U.S. trade deficit fell to its lowest level in 18 months in June, pushed down by a steep drop in oil imports and a rise in exports.

The trade gap narrowed to $42.9 billion in June, down from $48 billion in May, the Commerce Department said Thursday.

Exports rose 0.9 per cent to a record high of $185 billion. Overseas sales of autos, pharmaceuticals, and industrial machinery increased. Despite Europe's struggling economy, exports to the 27-nation European Union grew 1.7 per cent.

Imports fell 1.5 per cent to $227.9 billion, the lowest in four months. A key reason for the drop was the price of imported oil fell by the most in 3 1/2 years. That brought the trade deficit in oil to its lowest level since November 2010 and accounted for half of the improvement in the overall trade gap.

Excluding oil, the trade deficit dropped to $20.4 billion in June from $23.2 billion in May. Imports of computer equipment and TVs also declined.

A narrower trade gap acts as less of a drag on growth because it means the United States is spending less on foreign-made products and is taking in more from sales of U.S.-made goods.

The sharp drop in the deficit could mean the economy actually grew at a faster pace in the April-June quarter than first estimated. The government said last month that the economy expanded at a 1.5 per cent annual rate in the second quarter. It will issue its second of three growth estimates later this month.

Economists are worried that slower overseas growth will reduce demand for U.S. exports. About one-fifth of U.S. exports go to Europe, which is in the third year of a financial crisis.

So far, that hasn't happened. Exports are up 5.9 per cent in the first six months of this year compared to last year.

The rise in exports "suggests that the easing in global demand and the strengthening in the dollar have yet to take a major toll on the U.S," Paul Dales, an economist at Capital Economics, said in an email. "But we doubt this can last. Survey measures of export orders have already fallen sharply and it probably won't be long before actual export growth slows."

Higher exports helped cut the trade deficit with the European Union by 20.1 per cent to $8.4 billion. The trade deficit with China worsened, rising 5.2 per cent to $27.4 billion.

U.S. sales to China fell, possibly because that country's growth is slowing. Exports to China dropped 4.3 per cent to $8.5 billion.

A private trade group said last week that its survey of manufacturers found that export orders fell in July to their lowest level in more than three years.