U.S. Account Deficit in 2006 Sets 5th Consective Record, Though Shrinks Towards End of Year

The deficit in the broadest measure of trade set a record for the fifth consecutive year even though the imbalance in the final three months of 2006 shrank, reflecting a lower foreign oil bill.

The Commerce Department reported that the imbalance in the current account jumped by 8.2 percent to $856.6 billion, representing a record 6.5 percent of the total economy. For the fourth quarter, the deficit shrank by 14.6 percent to $195.8 billion, the smallest quarterly imbalance since the summer of 2005.

Click here to visit FOXBusiness.com's Economy Center.

Even with the fourth quarter improvement, administration critics say the soaring deficit for the whole year shows the failure of President Bush's trade policies to protect American workers. They contend that America is going into hock to foreigners at an alarming rate even though they have been more than willing so far to hold American assets in return for sales of televisions, cars and other goods to U.S. consumers.

The current account is the broadest measure of trade because it covers not only trade in goods and services but also investment flows between countries. It also represents the amount of U.S. assets that have been transferred into foreign hands to cover the gap between American exports and imports.

A deficit of $856.7 billion in 2006 meant that the United States was borrowing more than $2 billion daily to finance its trade gap. So far foreigners have been quite happy to sell to the United States and hold dollars in return, money that has been invested in U.S. Treasury securities, the stocks of American companies and other assets.

However, the concern is that if foreigners lose their appetite for U.S. investments, it could cause a big plunge in the value of the dollar, send stock prices crashing and interest rates soaring. If the adjustment were large enough, it could push the country into a recession.

While believing that the current account will have to come down in coming years, many economists also think the adjustment can be made at a more gradual pace that will not seriously disrupt the U.S. economy.

Click here to visit FOXBusiness.com's Economy Center.