(Adds analysts quotes, details)
By Doug Palmer
WASHINGTON, Feb 11 (Reuters) - A worldwide drop in demand for goods cut the U.S. trade deficit in December to the smallest in nearly six years, while U.S. applications for new mortgages tumbled nearly 25 percent last week as potential buyers held out for better terms.
The $39.9 billion trade gap was the smallest since February 2003 as both imports and exports fell for a fifth straight month, the U.S. Commerce Department said.
"The clear message is that global trade activity has collapsed, as the world economy sinks deeper into recession," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
The deficit shrank even more dramatically in November to a revised $41.5 billion, from $57.2 billion in October, as businesses and consumers began scaling back purchases in response to increasingly grave economic news.
The December trade data suggests the U.S. economy may have shrunk about 5.0 percent in the fourth quarter rather than the government's current estimate of 3.8 percent, Goldman Sachs economists said in a note.
Financial markets, however, paid little attention to the data as they focused on congressional efforts to send President Barack Obama an approximately $800 billion economic stimulus bill. Traders also looked for more details of U.S. Treasury Secretary Timothy Geithner's plan to shore up U.S. banks.
U.S. steel companies said the plummeting demand increased the need for Congress to include a strong "Buy American" provision in a final economic stimulus bill it hopes to send to President Barack Obama in coming days.
But other U.S. companies warn that could backfire on the United States by increasing the cost of stimulus public works projects and encouraging other countries to adopt protectionist measures that shut out American goods.
Canadian and European officials are expected to press Geithner on the Buy American provision at a meeting of Group of Seven finance leaders beginning on Friday.
CHINA TRADE PLUNGE
Chinese trade figures for January, also released on Wednesday, showed China's exports fell 17.5 percent from a year earlier, after a 2.8 percent decline in December.
China's imports plunged 43.1 percent, twice as much as December's 21.3 percent year-on-year drop, the General Administration of Customs said on Wednesday.
Both falls were the steepest since economists' records began in 1993. China's imports and exports have now fallen for three months in a row from year-earlier levels.
Canada reported on Wednesday it ran its first trade deficit in almost 33 years in December on plunging exports and weakness in crucial U.S. markets.
U.S. exports of goods and services in December fell nearly 6 percent for a second month in a row and would have dropped further if not for a big jump in civilian aircraft exports following the end of a strike at Boeing.
Overall U.S. goods exports plunged to the lowest since October 2006, while auto and auto parts exports fell to the lowest since November 2004.
U.S. imports of goods and services fell 5.5 percent, following an 11.9 percent drop in November, as businesses and consumers cut spending in the face of mounting economic woes.
Imports of autos and auto parts were the lowest since May 1999. Another big drop in the average price of imported oil to $49.93 per barrel, the lowest since December 2005, also helped push the overall import tally lower.
However, both U.S. exports and imports set a record for all of 2008 and the overall trade gap declined for the second year in a row to $677.1 billion.
The U.S. trade deficit with China in 2008 hit a record $266.3 billion as imports from that country rose to a record $337.8 billion. At the same time, U.S. exports to China last year were a record $71.5 billion.
The average price for imported oil in 2008 was a record $95.23 per barrel, pushing imports from Saudi Arabia and other members of the Organization of Petroleum Exporting Countries to a record $242.6 billion.
MORTGAGE DEMAND DROP
Meanwhile, requests for loans to buy homes sank last week to an eight-year low, the Mortgage Bankers Association said.
Buyers have postponed plans to purchase a house on expectations that the government could press 30-year home loan rates down to near 4 percent and institute a $15,000 home-buying tax credit. At the same time, home prices continue to fall, adding to the incentive to wait.
"In addition to waiting for the rate, you have home prices continuing to come down, so why would I pay $200,000 today when I can pay maybe $180,000 in a couple months or even $150,000," Daniel Penrod, industry analyst for the California Credit Union League in Rancho Cucamonga, California, said.
Average 30-year mortgage rates slipped to 5.19 percent last week from 5.28 percent a week earlier, the Mortgage Bankers Association said.
The rate has fallen more than a full percentage point in three months, but is up about 3/8 point from early this year and seen heading lower. (Additional reporting by Lynn Adler and Richard Leong in New York and David Ljunggren in Ottawa; Editing by James Dalgleish)