Imports increasingly burden US economy

The nation's growth rate slowed for the first quarter - and oil prices aren't the only reason.

The nation's insatiable appetite for foreign-made goods has joined energy as a brake on the economy.

In the latest chapter of the trade wars, imports are surging into the US at a record rate. The Bush administration - alarmed at the flood of imports, which includes everything from pillowcases to coils of steel - is looking for ways to help scores of ailing domestic industries.

Congress is pointing fingers at China, which last year had a record trade deficit of $176 billion. Even the giant Japanese auto companies - which only continue to increase their US market share - have become worried, suggesting they might raise prices to help Detroit.

The latest indication of the impact of imports came Thursday when the Commerce Department reported that the nation's gross domestic product rose by an annual rate of 3.1 percent in the first quarter - a figure lower than expected. The nation's enormous trade deficit knocked 1.5 percentage points from the economy's growth.

"The trade deficit is becoming more of a problem - just the sheer magnitude of it. And it is ballooning," says Mark Zandi, chief economist at Economy.com.

The yawning trade deficit wasn't the only thing sapping the economy. In the first quarter, energy prices soared as oil companies struggled to keep up with demand during a cold and wet winter in the Northeast. This meant consumers had to dig deeper into their pockets to fill up their tanks.

"Energy cast a pall over the economy," says Mr. Zandi.

The first-quarter GDP numbers, which will be revised later, may indicate that the soft patch the economy has entered may endure longer. Corporate inventories rose sharply. And as companies try to get inventories in line with sales, they may reduce production.

"It does imply that as inventories rise at a slower pace, that component will be a drag on the economy in the second quarter," says Richard DeKaser, chief economist at National City Corp. in Cleveland. "I will be reducing my estimate for the second quarter by about 0.5 percentage points to about the same vicinity we're in now."

Despite the slowdown in the economy, Federal Reserve watchers don't expect the nation's central bank will hold off on another quarter-point hike in interest rates when it meets early next month. "I think the Fed feels the factors weighing on the economy are transitory," says Mr. DeKaser.

Indeed, energy prices have been changeable recently. Thursday morning, the price of oil dropped $1.61 a barrel on the future markets. It has fallen nearly $6 a barrel in the past week. Gasoline prices have also plunged, falling nearly 8 cents a gallon Thursday morning.

"A slower economy feeds back to the energy markets. If the GDP is weaker, the oil markets may come down," says Michael Swanson, an economist at Wells Fargo Banks in Minneapolis. "What if China's economy cools from 10 percent growth to 7.5 percent growth? Oil could tumble $10 or $15 a barrel."

Lower oil prices would help to bring down the trade deficit in the months ahead. Yet some sectors of the economy will be going through structural changes no matter what happens to the price of oil.

That's definitely happening in the textile and apparel business. Last fall, most quotas came off textiles and apparel. The National Textile Association, based in Boston, reports that in the first three months of this year, imports of pillowcases were up 188 percent over the same time period last year; cotton sheets, 229 percent; and cotton towels, 177 percent. Large domestic mills, such as Springs Industries, Dan River, and WestPoint Stevens, have been closing facilities and laying off workers.

One of those companies that has been hurt by the imports is the Kentucky Derby Hosiery Co., based in Hopkinsville, Ky. Bill Nichol, the CEO, says he's been steadily consolidating his factories, which are based in Virginia and North Carolina, as imports have surged from China.

"We are perpetually shrinking," he says. "For every percentage increase of market share from offshore, there is less produced in the US."

Some of Mr. Nichol's plants are in Mount Airy, N.C. The contraction in the business hurts the city, says Mayor Jack Loftis.

"We have to have a tighter budget," he says, adding, "It also affects our real estate market because people move to where the jobs are."

However, imports also may benefit consumers. At eFashionSolutions, which markets celebrity clothes online, Keith Foy, vice president, says he is seeing better quality garments coming in for the same price. The reception by the consumer, he says, has been positive with sales of such brands as Baby Phat up 74 percent over last year. "A pretty good chunk of the imports are coming from China," he says.

The high tide of Chinese imports is prompting renewed calls for China to revalue its currency. This prospect may be why some importers are stockpiling goods. For example, Nichol estimates the Chinese have already shipped 80 percent of their 2005 quota, with six months still left in the quota year.

"If China revalues, it's certainly long overdue," says Axel Merk, who manages money out of Palo Alto, Calif. "But that means goods will be more expensive for the consumer. Unwinding the trade problems will be painful no matter how you do it."