The US trade deficit in goods narrowed in June for the first time this year, driven by a broad rebound in exports, but this likely wasn't enough to prevent trade from continuing to hinder economic growth in the second quarter. However, the negative impact on gross domestic product from the trade gap is expected to be counterbalanced by an increase in inventories at wholesalers and retailers in June. The government is set to release its preliminary estimate of second-quarter GDP growth on Thursday, which is anticipated to reflect an uptick in economic activity, largely due to a surge in consumer spending in June.
"The hit to second-quarter GDP growth from net trade will probably be offset by inventories and investment," noted Oliver Allen, senior US economist at Pantheon Macroeconomics. The Commerce Department's Census Bureau reported on Wednesday that the goods trade gap shrank by 2.5 percent to $96.8 billion. Goods exports rose by 2.5 percent to $172.3 billion, led by a 4.9 percent increase in food shipments and a 3.6 percent rise in capital goods exports. There was also a notable increase in exports of industrial supplies, including crude oil.
Motor vehicles and parts, as well as consumer and other goods, saw increased exports. However, these have been constrained by weaker global demand and a strong dollar due to the Federal Reserve's high interest rates. Imports of goods increased by 0.7 percent to $269.2 billion, with consumer goods imports jumping by 3.3 percent, likely indicating robust domestic demand. Capital goods imports rose by 2.6 percent, which is a positive sign for business spending on equipment.
Imports of other goods increased by 2.7 percent, but imports of industrial supplies, food, and motor vehicles declined. "Goods exports and imports both reversed their May declines in June," said Carl Weinberg, chief economist at High Frequency Economics. However, second-quarter imports exceeded the first-quarter average, while exports were lower.
Pantheon Macroeconomics estimated that trade subtracted up to 1.4 percentage points from GDP growth last quarter, marking the largest drag in over two years. Other analysts, including those from Oxford Economics and Barclays, see the June contraction in the goods trade gap as posing an upside risk to their second-quarter GDP estimates. Some of the June imports likely ended up in the warehouses of wholesalers and retailers.
The Census Bureau's report also showed that wholesale inventories increased by 0.2 percent in June after a 0.6 percent rise in May. Retail inventories climbed by 0.7 percent, boosted by a 1.8 percent gain in stocks at motor vehicles and parts dealers. Excluding motor vehicles and parts, retail inventories rose by 0.2 percent in June after a slight dip in May. Business inventories are estimated to have added approximately 1.5 percentage points to GDP growth last quarter after two consecutive quarters of subtraction.
According to a Reuters survey of economists, GDP likely grew at a 2.0 percent annualized rate in the April-June quarter. Both trade and inventory investment subtracted from GDP in the first quarter, with the economy growing at a 1.4 percent pace. Economists expect the trade gap to remain significant, with businesses, wary of potential new tariffs on foreign goods, accelerating imports ahead of the November 5 presidential election.
"The outlook for imports remains strong," said Matthew Martin, a US economist at Oxford Economics. "Consumer demand is resilient, and businesses are stocking up ahead of peak shipping season to replenish depleted inventories, and perhaps in anticipation of increased tariffs following the elections." After providing a substantial boost to the economy in the first quarter, the housing market has weakened due to persistently high mortgage rates and home prices.
A separate report from the Census Bureau on Wednesday showed new home sales fell by 0.6 percent to a seasonally adjusted annual rate of 617,000 units in June, the lowest level since November. This marked the second consecutive monthly decline, continuing a series of weak housing market indicators. The housing market has been the sector most affected by the Federal Reserve's aggressive monetary policy tightening.
Residential investment, which includes home building and sales, saw double-digit growth in the first quarter, but economists believe it likely contracted in the April-June quarter. The Fed has kept its benchmark overnight interest rate in the 5.25 percent-5.50 percent range for the past year, having raised its policy rate by 525 basis points since 2022 to combat high inflation.
The median new house price dipped by 0.1 percent to $417,300 in June from a year ago as supply increased. The inventory of new homes rose to 476,000 in June, 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, the longest since October 2022.
However, with mortgage rates expected to decline from their spring highs due to a potential rate cut in September, the outlook for the housing market is positive, especially for new construction. "If, as we expect, this most recent downward trend in mortgage rates persists, 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 increasing, the supply of previously owned homes remains historically tight."
