WASHINGTON – The U.S. trade deficit in goods narrowed in June as exports rebounded. However, this improvement probably was insufficient to prevent trade from remaining a drag on economic growth in the second quarter.
But, the impact on gross domestic product from the trade gap will likely be offset by a rise in inventories at wholesalers and retailers in June. The government is scheduled to publish its advance estimate of second-quarter GDP growth on Thursday, which is expected to show a pick-up in activity, thanks to a spurt in consumer spending in June.
Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said that inventories and investment will probably offset the hit to second-quarter GDP growth from net trade.
The goods trade gap contracted 2.5% to $96.8 billion, the Commerce Department’s Census Bureau said on Wednesday.
Goods exports increased 2.5% to $172.3 billion, led by a 4.9% surge in food shipments. Capital goods exports rose 3.6%. There was also a strong increase in industrial supplies exports, which included crude oil.
Motor vehicles and parts exports rose, as did consumer and other goods. Exports have been hampered by slower global demand and a strong dollar due to high Federal Reserve interest rates.
Imports of goods gained 0.7% to $269.2 billion. Consumer goods imports shot up 3.3%, likely reflecting solid domestic demand. Capital goods imports advanced 2.6%, which bodes well for business spending on equipment.
Imports of other goods rose 2.7%. But imports of industrial supplies, food, and motor vehicles fell.
“Goods exports and imports both reversed their May declines in June,” said Carl Weinberg, chief U.S. economist at High Frequency Economics. “However, second-quarter imports were higher than the first-quarter average, while exports were weaker.”
Pantheon Macroeconomics estimated that trade subtracted as much as 1.4 percentage points from GDP growth last quarter, which would be the biggest drag in over two years. Others, including Oxford Economics and Barclays, viewed the contraction in the goods trade gap in June as posing an upside risk to their second-quarter GDP estimates.
Some of the imports in June likely ended up in warehouses at wholesalers and retailers. The report from the Census Bureau also showed wholesale inventories increased 0.2% in June after rising 0.6% in May. Retail inventories climbed 0.7%, boosted by a 1.8% gain in stocks at motor vehicles and parts dealers. Retail inventories advanced 0.6% in May.
Retail inventories gained 0.2% in June after dipping 0.1% in May. This figure excludes motor vehicles and parts. This category goes into the calculation of GDP.
Business inventories are estimated to have added roughly 1.5 percentage points to GDP growth last quarter after subtracting from growth for two straight quarters.
INVENTORY BOOST
According to a Reuters survey of economists, GDP likely increased at a 2.0% annualized rate in the April-June quarter.
Both trade and inventory investment were subtracted from GDP in the first quarter, with the economy growing at a 1.4% pace during that period.
Economists expect the trade gap to continue to widen, with businesses, wary of new tariffs on foreign goods, ramping up imports ahead of the November presidential election.
“The outlook for imports remains strong,” said Matthew Martin, a U.S. economist at Oxford Economics. “Consumer demand is resilient, and businesses are stocking up ahead of peak shipping season to refill depleted inventories, and perhaps in anticipation of increased tariffs following the elections.”
After providing a sizeable boost to the economy in the January-March quarter, the housing market’s fortunes have waned amid persistently higher mortgage rates and home prices.
On Wednesday, a separate report from the Census Bureau showed new home sales slipped 0.6% to a seasonally adjusted annual rate of 617,000 units in June, the lowest level since November.
The second straight monthly decline extended the flow of weak housing data, including existing home sales, single-family housing starts, and permits.
The U.S. central bank’s aggressive monetary tightening has hit the housing market hardest.
It pulled out of its slump, with residential investment, which includes home building and sales, scoring double-digit growth in the first quarter. Economists believe that residential investment probably contracted in the April-June quarter.
The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for the past year. It has hiked its policy rate by 525 basis points since 2022 to tame high inflation.
As supply increased, the median new house price dipped 0.1% to $417,300 in June from a year ago. The inventory of new homes rose in June to 476,000, the highest level since February 2008, from 472,000 units in May. At June’s sales pace, it would take 9.3 months to clear the supply of houses on the market. That was the most since October 2022 and up from 9.1 months in May.
But with mortgage rates pulling back from the highs set in the spring on expectations of a rate cut in September, the outlook for the housing market is encouraging, at least for new construction.
“If, as we expect, this most recent downward trend in mortgage rates persists, however, then we think new home sales will be able to recover in the second half of the year,” said Thomas Ryan, North America economist at Capital Economics. “Even though home listings are slowly creeping up, the supply of previously owned homes remains historically tight.”
(Source: ReutersReuters)
