The Commerce Department reported Monday that the current account trade deficit fell by 5.5 percent to $178.5 billion in the July-September quarter. That was a better-than-expected showing and the smallest current account imbalance since a $173.4 billion deficit in the third quarter of 2005.
The current account is the most comprehensive measure of trade because it includes not only trade in products and services but also investment flows between countries.
The current account deficit had set all-time highs for five consecutive years but has declined for two consecutive quarters, prompting economists to predict that this year will see the deficit finally start to decline.
The improvement reflects in part the decline of the dollar against many other major currencies. A weaker dollar makes U.S. products cheaper in foreign markets while making foreign goods more expensive for American consumers.
The deficit in goods shrank by 2.2 percent to $199.7 billion in the third quarter as record levels of export sales helped offset a rising foreign oil bill.
The surplus in services, items such as airline tickets and consulting fees, increased by 3 percent to $26.5 billion. The surplus in investment income flows surged by 61.5 percent to $20.5 billion. The only deterioration occurred in the category that includes foreign aid, which rose to $25.8 billion, up from $23.2 billion the previous quarter.
The decline in the current account deficit left it a 5.1 percent of the country's total economic output, down from 5.5 percent from the second quarter. That was the lowest level in terms of GDP since the first quarter of 2004.
The government reported last week that the monthly deficit in just goods and services rose in October to $57.8 billion, reflecting record oil prices and a record deficit with China. While it was the highest monthly imbalance since July, economists are still looking for the deficit for the year to decline as American manufacturers see export gains from the weaker dollar and stronger growth overseas.
However, the U.S. trade deficit with China is running at a higher rate than a year ago, putting it on track to surpass last year's record and setting off a backlash in Congress, where many lawmakers are demanding that the United States impose economic sanctions on Chinese goods for what they see as unfair trade practices such as China's manipulation of its currency to gain trade advantages.
Treasury Secretary Henry Paulson led a delegation of Cabinet officials to China last week for a third round of high-level talks, but those discussions failed to achieve any breakthrough on the currency issue.