US trade deficit narrows at the end of Q2

Summary

The international trade deficit narrowed to $73.1B in June. We suspect cooler domestic demand, amid a moderating pace of consumer spending and business investment, will ease imports in the reminder of the year and help turn net exports into a neutral factor on overall GDP growth.

What a drag

After widening the prior two months, the U.S. international trade deficit narrowed $1.9B to $73.1B in June (chart). The improvement confirms net exports' smaller-than-expected drag on real GDP growth in the second quarter, which we learned last week. The monthly details show that exports increased 1.5% in June, while imports rose a more modest 0.6%. Thus it was real imports that outpaced real exports by a considerable margin for the quarter overall, resulting in the drag on growth in Q2 that stemmed from trade.

The monthly export gain was driven entirely by merchandise goods, as services exports slipped over the month. The robust 3.7% rise in capital goods exports was primarily due to civilian aircraft, computers and semiconductors (chart). The gain in imports was solid and more evenly shared between goods and services. The drivers of import growth were somewhat narrower with consumer (specifically pharmaceutical products) and capital goods supporting growth while industrial supplies, primarily crude oil imports, held back the gain.

Download The Full Economic Indicator