March 9 (Bloomberg) -- The U.S. trade deficit narrowed in January as imports fell and expanding economies in Europe and Asia boosted demand for American goods.

The gap between imports and exports shrank 3.8 percent to $59.1 billion in January, from $61.5 billion the month before, the Commerce Department said today in Washington. Exports rose 1.1 percent to a record. The shortfall with China, America's second-largest trading partner after Canada, widened.

A narrower deficit this year would mark trade's first contribution to growth in more than a decade, eliminating an area of weakness as home construction slows. U.S. demand for foreign goods may taper off as the economy cools, while orders for American products are likely to increase as overseas economies strengthen, economists said.

``There's some pickup in demand for U.S. goods at the same time that the slowdown in the U.S. has slowed demand for imports,'' said Kevin Logan, senior U.S. economist at Dresdner Kleinwort in New York. ``That's likely to continue this year as we expect slow growth to continue.''

The Labor Department said separately that the economy created 97,000 last month, less than in January as more seasonable weather prompted job cuts in construction. The job gains were enough to push the unemployment rate down to 4.5 percent from 4.6 percent. Average hourly earnings increased 0.4 percent, twice as much as in January.

Dollar Rally

The dollar rose and Treasuries dropped after the reports indicated a slowdown in the economy isn't deepening. The U.S. currency gained 0.3 percent to $1.3099 per euro at 9:05 a.m. and 0.9 percent to 118.24 yen. The yield on the benchmark 10-year Treasury note increased 8 basis points to 4.60 percent.

Economists had forecast the trade balance would narrow to $59.8 billion, from an originally reported $61.2 billion in December, according to the median of 69 projections in a Bloomberg News survey. Estimates ranged from $56 billion to $66 billion.

The politically charged trade gap with China widened to $21.3 billion in January from $19 billion a month earlier. U.S. Treasury Secretary Henry Paulson, finishing up a four-day tour in Asia, said yesterday that China needs to move quickly to open its capital markets, including allowing the yuan to fluctuate more freely.

China's Economy

Shifting the Chinese economy away from dependence on exports would help reverse what Paulson called a ``worrisome'' trend among U.S. lawmakers to embrace protectionism. Congress is considering legislation that would allow companies to petition for sanctions against nations that manipulate their currencies. A proposal from Republican Phil English of Pennsylvania and Democrat Artur Davis of Alabama would allow duties on imports from China to compensate for government subsidies.

Today's report showed exports increased to $126.7 billion in January from $125.3 billion a month earlier. U.S. companies shipped abroad more civilian aircraft, consumer goods, semiconductors and computers.

``Broader demand looks pretty solid in terms of consumer electronics,'' Texas Instruments Inc. Chief Executive Officer Richard Templeton said in an interview on March 7. The outlook for the semiconductor industry is ``a proxy the global economy and growth of countries like India and China and Russia.''

Imports of goods and services fell 0.5 percent in January, the first decline in three months, to $185.8 billion, from $186.7 billion. Imports of consumer goods declined to $38.4 billion, from $39.8 billion in December. American companies imported less clothing, televisions and toys.

Effect on GDP

Adjusted for changes in prices, figures the government uses in its calculation of gross domestic product, the U.S. trade deficit narrowed in January to $56.7 billion, from $57.8 billion.

A smaller gap will add 0.3 percentage point to growth this year, according to a forecast by economists at Lehman Brothers Holdings Inc. in New York. The last time the economy got a boost from a shrinking trade deficit was in 1995. The deficit averaged almost $64 billion a month in 2006.

Trade contributed 1.5 percentage points to growth last quarter, the most in 10 years, according to figures from the Commerce Department. Holding steady around the fourth quarter's lower level means trade is unlikely to add as much this quarter, economists said.

Oil imports rose to $24.5 billion, the highest since September, from $23.2 billion a month earlier. While the price of imported petroleum fell, demand increased with the return of more seasonable weather.

Oil Prices

Higher prices since the end of January may make it difficult for the trade gap to keep narrowing. The cost of a barrel of crude oil on the New York Mercantile Exchange was about $61 yesterday, up from $58 on Jan. 31.

``Oil prices have gone from consistent declines to a certain amount of month-to-month volatility,'' said Christopher Low, chief economist at FTN Financial in New York. ``A lot of the movement we see in the trade deficit over the next couple of months is going to be because of that volatility.''

The shortfall with Japan narrowed to $6.5 billion in January, from $7.5 billion. The deficit with the European Union shrank to $6.5 billion, from $9 billion.

The trade gap with Canada, the U.S.'s biggest trading partner, widened to $6.9 billion, from $5.6 billion. The deficit with Mexico narrowed to $4.6 billion from $5 billion.

To contact the reporters on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: March 9, 2007 09:16 EST