US goods trade deficit contracts, still expected to subtract from Q2 GDP growth

By Lucia Mutikani

WASHINGTON, July 28 (Reuters) – The U.S. trade deficit in goods narrowed in June amid a broad decline in imports, but the improvement was probably insufficient to prevent trade from again subtracting from economic growth in the second quarter.

The report from the Commerce Department on Tuesday also showed exports dropping to a five-month low, pulled down by a sharp decline in shipments of industrial supplies, which include petroleum. The decrease likely reflected a pullback in crude oil prices amid a fragile ceasefire between the U.S. and Iran.

With businesses ramping up investment in artificial intelligence, last month’s drop in imports is probably temporary. The AI build-out is heavily dependent on imports. The government on Monday reported a strong increase in orders and shipments for non-defense capital goods in June.

“Our model mapping the trade data onto the national accounts now points to net trade subtracting around one percentage point from second-quarter GDP growth,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

The goods trade gap contracted 4.2% to $101.5 billion last month, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast the goods deficit at $100.0 billion. The goods trade deficit average for the three months through June remained wider than the first-quarter average.

BROAD DECLINE IN IMPORTS

Goods imports decreased $8.2 billion to $306.2 billion. They increased 16.6% on a year-on-year basis in June. The decline in monthly imports likely reflected the fading boost from businesses rushing to restock to avoid shortages and higher prices due to the Middle East conflict.

Consumer goods imports led the decline, with a 3.8% drop. Imports of capital goods fell 2.0%, but surged 37.4% year-on-year. Food imports decreased 2.5%, while those of automotive vehicles dropped 2.5%. Industrial supplies imports fell 1.9%, likely reflecting lower oil prices.

Exports of goods fell $3.8 billion to $204.7 billion last month. Exports of industrial supplies tumbled 4.4%, also likely a function of lower crude prices. Food exports dropped 3.1%, while shipments of capital goods fell 1.1%.

But exports of automotive vehicles jumped 5.1% and those of consumer goods increased 3.2%. The government is scheduled to publish its advance estimate of second-quarter gross domestic product growth on Thursday. A Reuters survey of economists estimates the economy grew at a 2.1% annualized rate last quarter, which would match the first quarter’s pace.

Trade has subtracted from GDP for two straight quarters. Some of the anticipated drag from trade could be offset by robust business investment in equipment and an expected pickup in consumer spending. Inventories, which have been drawn down for four straight quarters, remain a wild card.

The Census Bureau report showed wholesale inventories increased 0.3% in June, matching May’s gain. Stocks at retailers were unchanged after rising 0.5% in May, though inventories at motor vehicle and parts dealers increased 0.4%.

Excluding motor vehicles and parts, retail inventories fell 0.2%. This component goes into the calculation of GDP.

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(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)