Minding the Gap ... или куда мы идем...

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Minding the Gap

By MARK GONGLOFF
THE WALL STREET JOURNAL

The U.S. trade deficit with the rest of the world shrank in September, a pleasant surprise for many economists, but not enough to end their worries about the world's imbalances, or to stop the dollar's continued decline.

The U.S. imported $51.6 billion more than it exported in September, the Commerce Department said, compared with a $53.5 billion deficit in August. Economists, on average, expected a gap of $53.5 billion, which would have represented a slight decline from August's initially reported deficit of $54 billion. A drop in oil imports helped the gap shrink in September, but the deficit improved even excluding petroleum products. Exports rose for the third straight month, an encouraging sign of global demand for U.S. products, thanks in part to a weakening dollar. "We're selling more overseas and that is good news," said Joel Naroff, president and chief economist at Naroff Economic Advisors. But most of the improvement in the trade gap came from Europe, where officials have chosen not to stop the euro from appreciating against the dollar, hurting European exporters. That situation may not last much longer; Asian officials have busily intervened to keep their currencies weaker and support exports, and European officials may soon join them.

What's more, most economists expect oil imports, or at least the dollar value of them, to rise again in October, pushing the trade deficit higher. "The September dip is welcome, but will prove temporary," Ian Shepherdson, chief U.S. economist at High Frequency Economics, told clients. Many analysts believe that worries about high trade and budget deficits will likely keep downward pressure on the dollar, which briefly touched a new low against the euro this morning, even after the trade data were released.

The news was better on other fronts. Import prices boomed in October, but only because of rebounding oil prices. Excluding oil, import prices fell, meaning consumers had one less inflation threat to worry about, for now. And new claims for unemployment insurance stayed relatively low, at 332,000, in the week ending Nov. 6, a sign the labor market's recent improvement may be continuing.

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Stocks Still Lack Direction
U.S. stocks showed little life for a third straight day, waiting for this afternoon's announcement by Federal Reserve policy makers about their decision on short-term interest rates. The Dow Jones Industrial Average gained more than 33 points, with about 650 million shares changing hands on the Big Board. The Nasdaq composite fell about 5 points, weighed down by Cisco's disappointing quarterly earnings results, reported last night. The near-month futures contract for crude oil rose close to $48 a barrel on the New York Mercantile Exchange, as traders chose to focus on the bullish aspects of conflicting reports about U.S. inventories of crude oil and oil distillates such as heating oil. U.S. Treasury bond prices fell, and the yield on the 10-year note rose close to 4.25%. The dollar fell to a record low against the euro and also fell against the yen. The major European stock markets rose, as did Asian markets.

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Fed Policy Meeting Begins
Federal Reserve policy makers began meeting to discuss the health of the U.S. economy and their target for the federal-funds rate, an overnight lending rate that influences other lending rates throughout the economy. At the conclusion of their meeting, at 2:15 p.m. ET today, central bankers are almost certain to announce that they raised that rate to 2% from 1.75%, marking their fourth straight rate increase of the year. Policy makers raise rates to fight inflation and cut rates to stimulate growth. Beginning in early 2001, they slashed rates to "emergency levels," the lowest in more than 40 years, to fight the effects of a slowing economy, terror attacks, a long bear market in stocks and a host of other headaches. Though economic growth has recovered, most consumer inflation measures have remained tame, and job growth has been spotty, allowing the Fed to very slowly raise rates back to a more normal level.

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Allawi's Relatives Kidnapped
Insurgents kidnapped two relatives of Iraqi Prime Minister Ayad Allawi, taking them from their homes in Baghdad. In a Web site posting, an Islamic group claimed it had taken three of Mr. Allawi's relatives and threatened to kill them if U.S. and Iraqi officials didn't release all Iraqi prisoners and end their assault on the city of Fallujah. The group's claim of kidnapping a third Allawi relative couldn't be verified. After little more than two days of fighting, U.S. forces controlled about 70% of Fallujah, which had been an insurgent stronghold for several months and, at one point, the alleged headquarters of Jordanian terrorist Abu Musab al-Zarqawi. Mr. Zarqawi and other leading foreign fighters and Iraqi insurgents are now believed to have fled before the U.S. invasion, but officials said there were still many insurgents cornered in southern parts of the city. So far, 10 American and two Iraqi troops had been killed in the battle to wrest control of Fallujah from the insurgency, matching the total killed during a three-week siege of the city in April. But officials described the casualties as light, and they certainly could have been much worse, if the house-to-house and street-to-street fighting envisioned by many had come to pass. Officials also warned, however, that the battle still wasn't over. And taking Fallujah won't mean the end of the insurgency, by any means -- attacks have intensified outside of Fallujah in recent days, in fact. Today, one U.S. soldier was killed and a second was wounded by a roadside bomb north of Baghdad. In northern Iraq, six Iraqi soldiers died and two were wounded when a roadside bomb detonated near an Iraqi military camp.

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Bush Picks Gonzales for Attorney General
President Bush has chosen White House counsel Alberto Gonzales, a Texas confidant and one of the most prominent Hispanics in the administration, to succeed Attorney General John Ashcroft. Mr. Ashcroft announced his resignation yesterday, as did Commerce Secretary Donald Evans, in the first -- but probably not the last -- post-election changes to Mr. Bush's cabinet. Mr. Gonzales, also considered a possible future nominee for the Supreme Court, has been at the center of developing Mr. Bush's positions on balancing civil liberties with waging the war on terrorism -- opening the White House counsel to the same line of criticism that has dogged Mr. Ashcroft.

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Palestinians Prepare for Arafat's Death
Rauhi Fattouh, the speaker of the Palestinian Authority's parliament and a man with little or no political power, will become the group's temporary president if Yasser Arafat dies, a move dictated by PA law. Some Palestinian officials had tried to change the law, but Palestinian Liberation Organization leaders apparently have decided to leave it alone. Mr. Fattouh will be president for 60 days, after which elections will be held. In another compromise, Palestinian leaders asked Israel for permission to bury Mr. Arafat at his compound in Ramallah, in the West Bank, and Israel agreed. Many Palestinians had wanted to bury Mr. Arafat in Jerusalem, but Israel seemed unlikely to accede to that demand. And a Palestinian official denied that the reason a top Islamic cleric had come to Mr. Arafat's bedside in Paris was to help decide whether to take Mr. Arafat, who has been in a deep coma for several days, off life support.

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Factory Output Slows in China
China's industrial production slowed in October, perhaps a sign of success in the government's efforts to temper runaway growth in the largely industrial economy. But economists said the underlying trend was still upwards, which could either mean that Chinese officials will have to pull more levers to keep the economy from overheating, or that they're managing to guide the economy to a soft landing. So far, the consensus seems to be that they have managed the latter. This debate is of more than passing interest to the rest of the world -- China's economy is the world's second largest, when its undervalued currency is adjusted to give it purchasing-power parity with the U.S. dollar, and the International Monetary Fund has estimated that it accounted for 24% of the change in world economic growth in the past three years. A "hard landing" by an overheated Chinese economy would have dramatic repercussions for China's Asian trading partners and the rest of the world.

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Federated Profit Edges Up
An October surge in sales, following a September slump, boosted third-quarter earnings of Federated Department Stores. The operator of Macy's and Bloomingdale's department stores reported earnings of $74 million, or 42 cents a share, up from $67 million, or 36 cents a share, a year ago, trumping Wall Street's consensus forecast, as compiled by Thomson First Call, of 39 cents. Sales rose were nearly flat at $3.49 billion. Sales for stores open at least a year ("same-store" sales) rose 0.4%. The company also repeated its forecast that fourth-quarter earnings would come in between $2.45 and $2.55 a share. It also forecast that same-store sales would be flat to up 2% in November and that December same-store sales could rise between 1% and 3%.