Analysis and discussion of issues that impact business

Not that this is a big surprise, but it is still is cause for concern.

America’s deficit in the broadest measure of foreign trade increased in the spring to the second highest level in history, reflecting a big jump in payments for foreign oil.

The trade deficit is both important and misunderstood.

Now, I wish I could tell you I was well-versed in foreign trade, but obviously I'm not. But my general philosophy is that asking questions is rarely a bad thing - military service excepted.

The Commerce Department reported Monday that the deficit in the current account rose to $218.4 billion in the April-June quarter, an increase of 2.4 percent over the deficit in the first three months of the year.

That doesn't look particularly good, but there's other news.

For the second quarter, the current deficit as a percentage of the overall economy stood at 6.6 percent, the same level as the first quarter.

For most of us in the real world, that means growth went up but so did the deficit. But as anyone knows, treading water when it comes to debt, is not getting ahead.

The deficits through the first six months of this year put the country on track for a fifth consecutive annual deficit, surpassing last year’s mark of $791.5 billion. The record high for a single quarter was a $223.1 billion imbalance in the October-December period last year.

While these numbers are a little scary, as a good friend of mine points out, it's amazing how resilient the American economic engine is, that it can absorb this type of pressure. But that's not to say it will do that forever.

So far, foreigners have been happy to hold dollars in payment for American purchases of cars, televisions and foreign oil. But the concern is what would happen should foreigners at some point decide they want to hold less in dollar-denominated assets.

A rush for the exits by foreigners could send U.S. stock prices and the value of the dollar plunging and send American interest rates sharply higher.

And that's allowing some to make political hay.

Democrats, hoping to take control of the House and Senate in the upcoming congressional elections, contend that the soaring deficit figures are evidence of the failure of the administration’s free-trade policies. The Democrats contend those policies have left U.S. workers vulnerable to unfair trade practices from other countries and contributed to the loss of nearly 3 million manufacturing jobs since President Bush took office.

It is election season though. I have a hard time imagining that every single one of those manufacturing jobs was lost due to free-trade. But I digress.

For the second quarter, the deficit on goods rose to $210.6 billion, an increase of $2.6 billion from the first quarter, reflecting in part the surge in oil prices. America’s surplus on services narrowed slightly to $16.8 billion.

Is that a sliver of light I see at the end of the tunnel? We can hope.

This deficit is expected to grow in coming quarters, reflecting the larger and larger amount of U.S. assets that are being transferred into foreign hands because of the huge trade deficits.

Then again, maybe not.

One thing's for sure. This problem won't be going away anytime soon, and we need to keep an eye on it.